A highly unpredictable and destabilizing U.S. trade policy has stoked volatility in financial markets. Stock markets sold off sharply following the reciprocal tariffs announced by President Trump on April 2, which were much more punitive than expected. The President has since back tracked with all countries, except China, announcing a 90-day pause period when a baseline 10% tariff will apply. And then more recently, further concessions were announced exempting most consumer electronics exports from China’s 145% tariff rate.
Recent developments suggest the White House might be willing to show flexibility and engage in potential tariff negotiations. Nevertheless, the 90-day pause extends the period of trade policy uncertainty, which continues to dampen confidence among consumers and businesses alike. Historically, lower confidence has led to reduced spending and hiring, posing challenges to economic growth.
Tariffs raise the cost of imported goods, prompting companies to pass these higher costs on to consumers, which in turn drives up prices and slows economic activity. Stagflation - a combination of stagnant growth and rising inflation - is an undesirable outcome, likely to prompt both fiscal and monetary measures aimed at mitigating its effects on the economy.
The decline in stocks signals a weaker growth outlook, though the full extent of the slowdown remains hard to assess due to unresolved trade policy issues and the trade war’s effect on corporate earnings. We anticipate continued market volatility until greater clarity emerges.
Investors are encouraged to focus on what they can control - maintaining a well-diversified portfolio across asset classes and sectors. Staying invested with a long-term perspective allows the power of compounding to work in their favor.
