What a difference 100 days makes. At 63 trading days since Inauguration Day, the S&P’s 14.5% drop is by far the worst start to a presidential term in the index’s history dating back to 1928. The next closest was the 9.3% drop seen at the start of FDR’s 3rd term in 1941.
Our stock portfolios are outperforming the U.S. stock market. We currently have approximately 20% of the portfolio allocated to non-U.S. stocks. Over the past few years, diversifying the portfolio away from large U.S. growth stocks has created a headwind for portfolio performance. That headwind seems to be turning into a tailwind as the U.S. has lagged almost every other country in the world in 2025.
It’s always challenging to isolate one reason for market movements. If we just look at economic numbers, it’s very hard to tell that anything has changed. The economy is creating jobs at roughly the same rate as in 2024, and the unemployment rate is right where it has been for the last six months. Government spending is actually $154 billion more than it was at this time last year.
The change in trade policy is the obvious reason for the change in market sentiment. On April 2nd, the Trump administration announced massive tariffs on imports. A tariff is a sales tax on imports. A few months ago, the tariff rate on imports was just under 2%. After the tariff announcements, the rate was 25%. This is the highest tariff rate since the early 1900s.
The change in psychology is showing up in the soft data. Business confidence and consumer confidence are falling rapidly. Consumers also expect inflation to increase. But, so far, the hard data does not yet reflect the change in expectations. There is too much uncertainty surrounding trade policy to know how and when it will impact the economy.
In economic terms, this unprecedented increase in tariffs acts as a supply shock. Currently, there is effectively a trade embargo between the U.S. and China. Companies have a few months’ worth of inventory in stock, so we have a couple of months before we start seeing the impact in stores.
The market reacted very negatively to the new tariff policy, dropping about ten percent in the first week. This apparently prompted the government to delay implementing the most draconian tariffs for 90 days, which caused the market to bounce back ten percent in one day. The current state of the market is such that any rumor can move the market up or down five percent in an instant.
It’s too soon to know how the current trade policy uncertainty will impact the economy. I’m skeptical that the current tariff policy will remain in place for very long. To give us some perspective, U.S. imports equate to about 10% of GDP. Analysts project that maintaining the current trade policy will shave 1-2% off of next year’s GDP. This would put us right on the cusp of recession.
Typically, lower growth expectations lead to lower inflation expectations. That is not the case today. Inflation expectations are moving sharply higher in response to the tariff announcements. This will pressure the Federal Reserve to keep interest rates higher for longer.
If we avoid a recession, then stocks have most likely hit their lows for the year. If we go into recession, a downside target of 4,500 for the S&P seems reasonable. This level would present an exceptional long-term buying opportunity.
I think it’s very unlikely that the most severe tariffs are in place for very long. I see three ways that we get past this. First, the Trump administration could reverse its policy at any time. Politicians don’t enjoy getting beat-up by market volatility day after day. They could announce a few trade deals, claim victory and suggest it was all a strategic bluff. This would be the quickest recovery.
The second quickest recovery, and the scenario that I think is most likely, is that the trade advisors will negotiate a few bilateral trade deals with Trump friendly countries like India, Japan and potentially South Korea. Eventually, they sign a deal with China or create a number of exemptions to bring us somewhere close to business as usual. In this scenario, we will see some progress in the next few weeks. Hopefully, most of the outlines to the agreements will be in place by the end of this summer.
If we persist with a very aggressive trade policy, the economy will slow down, and inflation will increase. It would look something like the 1970s after the Arab oil embargo. This scenario would likely lead to a disastrous mid-term election for the Republicans. Persistent economic weakness, and higher than expected inflation would fracture the Trump coalition. In this worst-case scenario, the trade wars would most likely end no later than 2028.
We always counsel clients that we want at least a five-year time horizon for assets invested in stocks. The resolution to the current trade panic will most likely come within the next few months. For long-term investors, the current period is a nuisance at worst, and a buying opportunity at best.
This is the ninth market panic of my career. Each episode is different, but the market reactions are very similar. The initial stage feels like a free-fall as we approach the peak of uncertainty. Eventually, the market stabilizes as it starts to discount the worst-case scenario. As investors recognize that the worst case is not the most likely case, the panic ends and the recovery begins:
Thai Currency Crisis 1997
Long-term Capital Management 1998
Dot-Com Bubble 2000-2
9/11 2001
Enron/Accounting Scandals 2002
Global Financial Crisis 2008-9
Debt Ceiling/Debt Downgrade 2011
Covid 2020
Trade Wars 2025
Markets are the ultimate check to ill-conceived economic policy. Politicians oppose market reality at their peril. History shows that political movements that oppose market preferences don’t last very long.
