David Hagee Executive Vice President, Chief Investment Officer
On April 2, President Trump announced a global 10% tariff along with country-by-country tariffs. The initial tariffs are based on the proportion of each country’s trade imbalances with the United States. As an example, the initial rate set on goods imported from China was 34%. After exchanging additional reciprocal tariffs, the U.S. tariff now stands at 125%1 on Chinese goods. The proposed tariffs were set to go into effect on April 9, but a pause was announced for all countries except for China. Additional reciprocal tariffs will be put in place if countries decide to raise their tariffs in response to the U.S.’s initial tariffs.
These reciprocal actions could boost the average tariff rate on goods from 2.5% to 23-25%. This would be the largest boost to tariffs in recent history, surpassing the roughly 20% Smoot-Hawley tariffs in 1930. If the tariffs were to be implemented, the average household could see significant increases in the cost of goods.
These materially higher tariffs have already provoked some retaliation from other countries, especially China and if left unchecked, have the potential to trigger a trade war with global economic ramifications.
Economic impacts — a growth slowdown
The tariffs are likely to increase near term inflation, slow real economic growth, reduce productivity growth, which has been a recent bright spot, as well as dent corporate profits. These tariffs are effectively a tax on consumption, just like a sales tax, the impact of tariffs would be disproportionately felt by lower-income households.
Figure 1 - Projecting the Impact of Tariffs (CPI Inflation Year-over-Year)
These relatively indiscriminate and higher than expected levies shocked global financial markets, with the S&P 500 Index falling more than 10% in the two days following the tariff announcement. Treasury yields declined as investors flocked to safety. Credit spreads, a measure of borrowing cost for corporate America, widened making it more expensive for corporations to borrow. Oil prices, which are historically tied to economic growth, have fallen in line with lower growth expectations. The dollar has fallen by about 5% this year compared to U.S. trading partners’ currencies, as a currency typically does when a country adds protectionist measures.
Figure 2 - Corporate Credit Spreads (1/31/91 through 4/7/25)
Over the course of 2025, the S&P 500 has dropped into bear market territory. Markets that experience a 10% decline are considered in correction territory, whereas bear markets begin with a 20% decline. Bear markets average a 34% return drawdown.
The U.S. economy entered 2025 growing at better than 2%, but the tariff and policy uncertainty could be strong enough to derail economic growth. The market currently has priced in lower economic growth, with the probability of a recession rising.
Market impacts — enduring for opportunity
Market volatility represents an opportunity to evaluate positioning inside portfolios. When the market does hit a bottom, investors will be looking for a level of certainty and understanding around the economy, creating the ability to manage businesses and generate earnings. The policy uncertainty created by the tariff announcements is potentially as much of a hazard to the markets as the actual tariffs themselves. It will be difficult for the markets to make much progress until a more certain outlook unfolds.
The market experienced sharp declines in response to the tariff announcements, stemming in part from an overconcentrated equity market and stretched valuations. Today, the market has experienced oversold conditions and is rife with pessimism. The market is starting to discount a recession and remains relatively expensive from a valuation level, especially as earnings estimates begin to ratchet lower.
Fixed income
The diversification benefits of an allocation to fixed income are well known but are often most appreciated during periods of weakness in the stock market. In the 26 years that U.S. large-cap stocks posted negative returns since 1926, bonds have delivered positive returns in all but three years.
Bonds are acting as the diversifier they are supposed to be. The Bloomberg US Aggregate Bond Index, a proxy for the broader bond market, is up 3.69% year-to-date through April 4 in contrast to U.S. stock indices down 13-19% over the same period. The municipal market is also up about 1.5% year-to-date.
Equities
We expect volatile equity markets near term as we work through retaliatory tariffs, the administration’s reaction, possible negotiations, legal challenges to the tariffs, and how U.S. and international companies respond. Year-to-date, the international markets are up, with the MSCI EAFE Index and Emerging Market (EM) Index up 1-2%. In terms of overall equity exposure, earnings expectations need to be adjusted lower. Any hint that we avoid a recession would rally the market from here.
Overall equity market averages are down considerably, but under the surface the market is picking winners and losers. Companies that are relatively immune to tariffs, such as domestically focused firms that don’t import many goods, are holding up well. Those that import goods such as apparel, footwear, and technology companies are faring worse. Separating winners from losers is usually a sign that the market is trying to find a bottom rather than indiscriminate selling, where large pieces of the market are sold off without regard for the individual characteristics of the securities.
Alternatives
Alternative investments do not zig and zag at the same pace as the U.S. stock market, making them a diversification tool. While they offer characteristics unique to the alternatives vehicles being used, they can provide a hedge against public market exposure. Diversification is key to portfolio resilience as demonstrated by the various sectors’ disparate returns this year.
Asset allocation drives returns
Corrections are a normal part of cyclical markets. We continue to hold to our core belief that asset allocation is the driver of portfolio returns. Reevaluating and rebalancing portfolios to align with clients’ long-term goals remains our path to success. The Commerce Trust team is here to help our clients navigate through economic and market uncertainty and deliver tailored portfolios.
Past performance is no guarantee of future results, and the opinions and other information in the commentary are as of April 10, 2025. This summary is intended to provide general information only and is reflective of the opinions of Commerce Trust. This material is not a recommendation of any particular security, is not based on any particular financial situation or need and is not intended to replace the advice of a qualified attorney, tax advisor or investment professional.
Diversification does not guarantee a profit or protect against all risk. Commerce Trust does not provide tax advice or legal advice to customers. Consult a tax specialist regarding tax implications related to any product and specific financial situation. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
Commerce Trust is a division of Commerce Bank.
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