Reciprocal Tariffs Announced, Markets React
- Trevor Cobb
- Apr 6
- 5 min read
On April 3rd, President Trump announced unexpectedly large and sweeping reciprocal tariffs, sending shockwaves through financial markets. The new tariffs, which are set to take effect as early as April 5th, with most beginning on April 9th, have taken many by surprise. Analysts had initially expected tariff increases to be in the 15-17% range, but the new average tariff increase has come in at a surprising 20% range—far higher than the 9-10% that markets had priced in.
Reciprocal Tariffs
While many had anticipated the tariffs would come into effect in May, leaving time for negotiations, the expedited timeline for implementation caught the market off guard. As a result, markets saw significant declines: on April 3rd, the market dropped by around 4%, exceeding the 1.5% movement implied by volatility models. The downward trend continued on April 4th, with another 5% drop, signaling increasing concerns over the potential for a prolonged trade conflict.
Economic and Market Consequences
The new tariffs could have significant economic consequences, both in the short term and long term. Economists estimate that tariffs could shave off 1.5-2% from annualized GDP growth, a notable drag on economic activity. Corporate earnings are expected to decline by 5-7%, as companies face higher costs for imported materials and may be forced to raise prices to offset the impact.
Inflation may also rise due to the higher import costs, which would complicate the Federal Reserve’s ability to implement rate cuts to stimulate the economy. The effective tariff rate on U.S. imports was expected to jump from 3% to 22% by 2025, putting additional pressure on businesses and consumers alike. However, Chinese import tariffs have now approached 60%, adding further complexity to the global trade environment.
These broad, non-product-specific tariffs are raising concerns about structural issues in global trade. Countries like Switzerland, which were not directly involved in the trade dispute, are finding themselves affected by these tariffs, raising questions about the fairness and sustainability of the new measures.
Silver Linings
Despite the turbulence in the markets, there are some positive aspects to consider. First and foremost, our portfolios were conservatively positioned prior to the announcement, allowing us to weather the initial market reaction (. On April 3rd, we were able to deploy dormant cash, taking advantage of lower prices as we reposition our portfolios to capture potential opportunities in the ongoing selloff, which we believe may continue for some time.
While volatility has been elevated, it has remained orderly with limited panic selling, which suggests that markets are absorbing the news without major disruptions. There is also the possibility that these tariffs will serve as a negotiating ceiling rather than a firm baseline, similar to the trade talks of 2018–2019, where tensions ultimately led to negotiations and some compromises. This is our base case.
Additionally, we may see exemptions for allies such as Japan and Europe, who could receive favorable treatment in return for trade concessions. Interestingly, Switzerland has been given a higher tariff rate than its neighbors, with the U.S. applying a baseline 10% tariff effective April 5, 2025, and an additional 21% tariff starting on April 9, 2025. Key Swiss exports such as machinery, watches, and agricultural products like coffee capsules, energy drinks, cheese, and chocolate will be affected. While the Swiss government has expressed confusion over the tariff calculations, they have also made it clear they have no intention of retaliating, suggesting a desire to avoid further escalation.
Investment Strategy
Heading into this period of heightened volatility, multiple investment firms such as J.P. Morgan, Morgan Stanley, and Goldman Sachs had recommended an overweight position in the S&P 500. However, our view has been—and continues to be—that the U.S. market is currently overpriced, offering limited upside potential at these elevated levels. We remain underweight in the U.S. market, as it may be entering a prolonged downtrend or may simply underperform non-US equities for an extended period.
Given the current environment, we favor owning real assets, such as gold, as well as short duration fixed income assets, which provide downside protection and income. Within our equity exposure, we prefer non-U.S. equity. Finally, with interest rates still attractive compared to equities, we believe that fixed income remains a strong place to park capital, especially during a period of market uncertainty. We will deploy that capital as markets get less expensive.
Sector Themes
Several sectors have already begun to feel the effects of the changing market landscape. Technology, particularly the "Magnificent 7" (Apple, Microsoft, Amazon, Google, Meta, Nvidia, and Tesla), is down around 14% year-to-date. This underperformance comes amid growing concerns that the AI-driven bubble may be deflating, with rising Chinese competition threatening to disrupt the dominance of U.S. tech giants.
Catalysts to Watch
Several key catalysts could influence the market in the coming weeks:
April 9 tariff implementation: The deadline for tariffs to be fully implemented could shift market sentiment, especially if pre-deadline deals are struck.
Retaliation from foreign nations: Further responses from China or other trade partners could escalate tensions or lead to negotiations.
Earnings season: Corporate earnings, especially if companies beat lowered expectations, could provide some relief for markets.
Fiscal policy surprises: Any unexpected fiscal measures, such as tax cuts or stimulus packages, could provide a boost to the economy and market sentiment.
Additional Economic Signals
Economic indicators are starting to show signs of slowing growth. The ISM New Orders minus Inventories index has rolled over, signaling that growth may be decelerating. The Atlanta Fed's GDPNow model has revised down Q1 growth to approximately 0.5%, and consensus GDP forecasts for 2025 are now trending toward a more modest 1%.
Tariff Landscape & Non-Tariff Barriers
The U.S. is now imposing the highest share of tariffs relative to GDP in over 100 years. In addition to tariffs, non-tariff barriers—such as technical and sanitary regulations—are increasingly gaining attention. Some countries, like Vietnam, have implemented hidden barriers that are effectively equivalent to tariffs of 20% or more. These obstacles further complicate global trade, making it harder for businesses to navigate the international landscape.
Business Confidence
CEO sentiment and capital spending plans are sharply declining, likely due to the uncertainty created by tariffs and other policy concerns. The ongoing trade war, along with shifting U.S. policies, is contributing to a more cautious outlook among business leaders.
Outlook Scenarios
There are two potential paths forward:
Concessions from foreign nations: If foreign countries make concessions, tariffs may become temporary, leading to a recovery in market sentiment. We feel this is most likely (60%) and we have already seen Vietnam come to the table. Thus, we are positioning modestly in favor of this outcome.
Escalating tariff war: If the trade conflict deepens, prolonged tariff battles could have significant negative effects on global growth. Most of the downtrend is likely to play out between April 2nd and 9th. There is some risk that this path comes to fruition (40%).
The market is already down around 9% from its peak, and a further decline is possible. Given the current volatility, investors should remain vigilant and adjust their strategies accordingly.
In conclusion, the new tariffs are having a substantial impact on global markets, and while there are some potential silver linings, the economic and market consequences are far-reaching. As the situation unfolds, staying positioned to react to changing conditions will be key for investors navigating this turbulent environment.
