On April 2, 2025, President Trump unveiled a new round of tariffs, a cornerstone of his second-term trade agenda. We will delve into our thoughts on these tariffs and their implications for global trade and markets below, but first, we wanted to remind you that diversification continues to be the linchpin of a sound portfolio. While the U.S. stock market has experienced losses this year, international markets and fixed income have provided stability to portfolios. Although it’s a natural instinct to panic during times of market stress, it’s important to keep a long-term perspective in mind as the tariff situation plays out.
We believe that yesterday’s actions will be the beginning of tit-for-tat tariff announcements, with other countries responding with retaliatory tariffs of their own. These mutual tariffs represent a headwind for economic growth and will impact earnings, although the earnings impact will largely be a function of how long the tariffs are in place. It’s important to note that the U.S. is a significant importer of goods from abroad, so while tariffs on U.S. goods will negatively impact U.S. companies and consumers, foreign countries on the receiving end of these tariffs will be harmed to a greater degree. This is the core component of President Trump’s negotiating stance. Additionally, maintaining Republican control of the House and Senate is a major goal for the Trump administration. With mid-term elections coming up next year, we believe that the tariffs will ultimately prove transitory and a negotiating point due to their negative impact on the economy. If tariffs are in place for an extended period, their economic impact and broad unpopularity will render Republican victories in the mid-terms difficult. While certain industries, such as autos, may see longer term adjustments to trade policy, we see negotiation as the most likely ultimate outcome.
While these policies are headwinds for economic growth, we also are confident in the resilience of the American economy. In particular, the labor market has remained strong, with companies continuing to add jobs in March, muted levels of March layoffs, and continued wage gains. We expect some weakening in the jobs figures as we move forward, but this would also likely happen in the absence of tariffs as the job market returns to levels closer to historic norms. Although we have seen a pullback in consumer spending and an increase in the savings rate amidst the recent economic uncertainty, consumers’ balance sheets are in solid shape, and we expect spending to pick up as we receive clarity on tariffs.
At times like these, it can be helpful to remember that we are investing in some of the best companies in the world, not their underlying economies. These well-managed companies have found ways to consistently earn money in slower growth environments, and they will continue to do so. We expect a productivity boost in the coming years thanks to continued investment by firms in areas including Artificial Intelligence (AI). Importantly, this productivity gain is likely to be seen by all firms as the benefits of AI make their way to each corner of the economy, similar to the path of the Internet productivity boost over 20 years ago.
As previously mentioned, diversification has helped this year, and this is also true within U.S. equities. The market impact in 2025 has been disproportionately concentrated among the “Magnificent Seven” stocks, which have collectively declined by 19.26% year-to-date (YTD) as of the time of this writing on April 3, 2025. In stark contrast, the other 493 stocks in the S&P 500 Index are down just 3.06% YTD, highlighting the resilience of diversified U.S. equities amid the tech-heavy giants’ downturn. We have been strategically market-weight to underweight the Magnificent Seven equities prior to these tariff announcements, preferring to be selective with the names at more attractive valuations. Note that the S&P 500 Index itself is down 8.15% YTD.
We have also added further diversification into portfolios this year by increasing our allocation to international equities, which have delivered a YTD gain of over 3.5% so far in 2025. Fixed income adds a steady lift too, as yields have fallen in response to the tariffs, which has supported bond prices. The low correlation of bonds with stocks in 2025, coupled with their predictable cash flows, helps mitigate downside risk, aiding in capital preservation and providing a counterbalance against broader market turbulence.
Looking ahead, we are closely monitoring developments regarding tariffs and elsewhere. We feel your portfolio is positioned well for the current environment and will look to make changes as conditions warrant and opportunities arise. Since the tariff news, market expectations for rate cuts from the current 4.25%-4.5% range have increased from three cuts this year to four. Potential tailwinds from tax cuts and a new tax bill, such as the extension of the 2017 Tax Cuts and Jobs Act or a proposed corporate tax reduction to 15% for domestic manufacturers, could stimulate economic growth and equity performance. The Trump administration’s deregulation push, particularly in the banking and energy sectors, may boost market sentiment and corporate profitability as well, although this is more likely to affect markets longer term.
We thank you for your continued confidence and remain vigilant with regard to the market and your portfolio. We will continue to safeguard your assets and are always available to discuss your portfolios and long-term financial plan.
