Tariffs & the Market Reaction
It's been quite a week...
As you know, President Trump announced new tariffs on nearly all major U.S. trading partners on Wednesday. The tariffs proved more stringent than anticipated and the markets reacted negatively to the news.
Wednesday's much anticipated announcement was the latest development in what has been a turbulent few weeks. The chart below takes a closer look at some of the specifics of these tariffs and their potential impact:
The orange bars represent the tariffs each individual country imposes on U.S. goods as calculated by the White House. The blue bars are the discounted "reciprocal tariffs" announced by the administration. These tariffs appear to be based on the trade deficit ratio with each country. The average tariff for U.S. trading partners will be 25% as they become effective over the next week.
The figures above include the 10% minimum tariff that will be applied to nearly all imported goods. The new tariffs include 34% on China, 20% on the EU, and 25% on all imported automobiles. These tariffs are in addition to those already in place. Canada and Mexico remain subject to previously announced 25% tariffs linked to the flow of illegal immigrants and drugs across our borders.
What's Next?
What's clear is that the markets don't like tariffs. Tariffs represent a significant shift in the global economic system that comes with uncertainty. How will China, the EU, Mexico and Canada respond? Will these tariffs be negotiated over time? Will tariffs stoke inflation, slow economic growth and lead to stagflation - or worse, a recession?
The number of unknowns is currently high. Uncertainty has sent the S&P 500 into a correction. A "correction" is traditionally defined as a decline of at least 10% from a recent peak.
The S&P 500 is down 17% from its February 19th high and down about 13% for the year. While we don't know what's ahead here's a look at the last two dozen stock market corrections since World War II:
Here are a few key takeaways from this chart: (1) pullbacks of 10% or more are fairly common; (2) corrections average 14% across all declines; (3) the lead-up to corrections can be lengthy; and (4) recoveries tend to happen swiftly, averaging about four months. The current situation remains dynamic and we will keep you up to date in the days and weeks ahead.
While we recognize the investment climate is uncomfortable, we know that the best course of action is to remain steadfast and disciplined in our investment approach.
If you would like additional insights or guidance, schedule a call.
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