04/07/2025
Earlier this week, U.S. President Trump announced sweeping tariffs against most imports into the United States. This announcement, termed “Liberation Day” by the president, marked the culmination of weeks of anticipation, with investors, businesses, and the public waiting for clarity on his approach to trade. The market reaction has been swift and dramatic.
Initially, there was an expectation of a calculated and detailed evaluation of trade relationships on a country-by-country basis. However, the broad-based tariffs unveiled on April 2 reveal a sharp departure from that narrative, raising concerns about the predictability of future policy signals from Washington. This unprecedented move—the largest shift in U.S. trade policy in nearly a century—has led many to question whether these decisions stem from a coherent strategy or impulsive actions.
On a positive note, Canada and Mexico have largely escaped the brunt of these new tariffs, thanks to exemptions tied to USMCA compliance. This spares Canadian and Mexican trade from the broader 25% tariff, which will significantly impact other nations. China, however, has faced the harshest measures, with stacked tariffs exceeding 50%.
U.S. Treasury Secretary Scott Bessent has cautioned trading partners against rash retaliatory actions, advising a “wait and see” approach as negotiations progress. This advice applies to investors as well, emphasizing the importance of managing risk in an environment dominated by policy surprises and volatility.
The Tariff Details President Trump announced two key measures:
1. A universal 10% import duty on all goods entering the U.S., effective April 5.
2. Reciprocal tariffs targeting imports from 60 countries, calculated at half the rate those nations impose on U.S. exports. These tariffs will take effect on April 9.
These measures aim to revitalize U.S. manufacturing and industrial sectors. However, economists warn of potential inflationary pressures and higher consumer prices. While the term “reciprocal tariffs” might suggest fairness, the reality is more nuanced. The calculation for these tariffs stems from dividing the U.S. trade deficit with each country by total imports and then halving that figure.
The Market Reaction
The market response has been overwhelmingly negative. Investors have shifted away from equities, favoring the safety of fixed income assets. U.S. equities, particularly the S&P 500 Index, have seen significant declines, partly due to its higher sensitivity to tariffs compared to indices like the S&P/TSX Composite. Additionally, the elevated valuation of the S&P 500 heading into 2025 made it more vulnerable to downside risks.
Year-to-date, the S&P 500 is down approximately 12%, with a 16% decline from its February 19 peak. In contrast, the S&P/TSX Composite has fallen 5.5% year-to-date, while international equities and emerging markets have shown resilience, still up 6.6% and 2.5% respectively in USD terms. Bond yields have also reacted as investors embraced a flight-to-safety mentality, with the 10-Year U.S. Treasury Yield dropping 40 basis points to below 4%.
The uncertainty surrounding the longevity of these tariffs presents a critical unknown. Prolonged tariffs could lead to economic stagnation, higher inflation, and even recession. However, this scenario is considered less likely, as policymakers are aware of the risks and may use these tariffs as leverage in negotiations rather than a long-term strategy.
Historical Perspective and Investor Guidance.
As much as we are loathe to say it – this time might actually be different. This trade-driven volatility has not resulted from external shocks like the COVID-19 pandemic in 2020, nor the financial crisis of 2008-09. Instead, it is a policy-induced disruption—a reversible situation. While markets dislike uncertainty, corrections and volatility offer opportunities for investors to recalibrate their strategies.
For context, corrections—defined as drops of 10% to 20% in equity indices—have occurred 24 times for the S&P 500 since 1946. These corrections typically last six months, with one-year returns averaging 25.1% following the bottom. And a bottom may be forming now. One of the more reliable historical indicators to the end of the downside volatility is the CBOE Volatility Index (VIX). When the VIX surpasses 30, it tends to signal peak pessimism among investors, often marking a buying opportunity. Historically, this has led to positive one-year returns 87% of the time, averaging 22.1% since 1990. With the VIX breaking above 30 today, investors may want to begin considering opportunities amidst the uncertainty.
As we have seen with the recent market reaction across asset classes and geographies, the response is not even. Some asset classes have benefited from the recent volatility including high quality bonds and historical safe-haven trades such as gold, while others have faced greater downside like the US-centric S&P 500 and NASDAQ Indices. While the market environment can appear quite dire when only looking at U.S. equities, a broader view highlights the benefits of a diversified portfolio across a number of asset classes where some can mitigate the volatility of others. We encourage investors to keep in mind that the environment, while uncomfortable, is temporary and will pass.
