U.S. Trade Policy Continues to Whipsaw Markets
Posted on April 10, 2025
Entering 2025, many expected that the advantages that have served the U.S. well, such as leadership in technology, flexible labor supply, deep and liquid capital markets, and energy independence, would result in another year of steady returns. The incoming administration’s pro-growth, pro-business orientation, de-regulatory leanings, and tax-friendly proposals, further helped propel the market to new records in mid-February.
Subsequently, indices rapidly retreated by more than 20%, the common threshold for a “bear market”, before recovering almost 10% on a single day, April 9. What’s been driving this shift in sentiment and unusual volatility? In a word, uncertainty. Uncertainty in markets is not unusual, it is the basic condition of investing. But the unprecedented pace, scope and scale of the administration’s executive actions have created currents, and cross-currents, that are overwhelming even the most seasoned investors.
The most meaningful of these actions has been the imposition of tariff rates on each and every trading partner of the United States, to at least 10%, and for a subset of 90 countries, rates well above 10%, after the current 90-day pause lapses in July. The stated goal of these measures is to achieve reciprocity in the treatment of U.S. exports both in terms of explicit tariff rates, but also in recognition of other non-tariff inequities. Among the most commonly cited violators of trading norms is China, frequently accused of intellectual property theft, illicit subsidies to its domestic producers, market barriers, and currency manipulation.
So while the goal of free and fairer trade is laudable, the execution has caught markets flat-footed. The imposed rates were well above expectations, highly punitive, and calculated in a manner that many economists considered not rigorous. As examples, the European Union was hit with 20%, Japan 24%, India 26%, Taiwan 32%, and China 34%, with enactment dates that were notably just 1-week out, April 9, leaving little time for negotiations with the entire world. By contrast, the USMCA, the successor to NAFTA signed in December 2019, took over 2 ½ years to negotiate and adopt. But on April 9, the administration yielded to the market’s poor reviews, and opted to delay full implementation by 90 days, for every country save China, whose rate was set at a paralyzing 145%. This trade overhang will therefore remain until at least early July, with the potential for more market fireworks.
Trade policy uncertainty in turn is flowing into concerns over the possible knock-on impacts on this year’s economic growth, inflation, and interest rate trajectory. Accordingly, in its March 19 meeting, the Federal Reserve lowered its projections for 2025 GDP growth to 1.7% (from 2.1%) and increased its core inflation expectations to 2.8% (from 2.5%). Chairman Powell repeatedly acknowledged (16 times) how this uncertainty is making the monetary path increasingly difficult to chart.
Another factor in the downturn in markets has been valuation. Entering this year, stocks were expensive, in the highest decile of historical valuations. The highest of those valuations has been in the IT sector, which is also where the largest price declines have been centered during this uncertain period. Further denting sentiment were headlines in late January that the Chinese AI model DeepSeek had outperformed U.S.-based models at a fraction of the development cost. The “Magnificent 7” of top technology-driven firms, after accounting for about 60% of the market’s returns in 2023 and 2024, are down 25% on average in 2025, and responsible for 55% of the overall market’s decline.
This underscores the essential value of diversification: to realize your investment goals over the cycle, which is often achieved by some assets performing when others are not, or when the low probability event occurs, such as the “Mag-7” becoming the “Lag-7”, while the Health Care and Staples sectors outperform this year.
Diversification, and disciplined, fundamental security selection remains central to our work each and every day. We remain nimble and vigilant to the opportunities and risks, should they arise along with the rising uncertainty. We would be pleased to review your portfolio and discuss your investment goals. We are ready to help.
Kristian R. Jhamb, MBA, CFA
Chief Investment Officer
LEGAL, INVESTMENT AND TAX NOTICE: This information is not intended to be and should not be treated as legal advice, investment advice or tax advice. Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal or tax advice from their own counsel.
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