Market Monitor | March Update
Headlines and Highlights
- Trump’s sweeping reciprocal tariffs far tougher than expected: President Trump announced a minimum universal tariff of 10% on U.S. imports and targeted some of the nation’s largest U.S. trading partners with far bigger levies in a long-promised offensive against the global trade system. He said the reciprocal tariffs mark “our declaration of economic independence,” helping American industry and getting back at “foreign scavengers” who he said have “looted, pillaged, raped (and) plundered” this country for decades. Imports from the European Union, Japan and South Korea will be subject to tariffs of 20% or more and Chinese imports will be hit by an additional 34%, combined with previous levies, of a whopping 79%. U.S. allies condemned the moves while economists said they risk igniting inflation and damaging the global economy.
- Consumer confidence falls: Anxiety about tariffs and inflation sent consumer sentiment plunging to its lowest level in years last month. The Conference Board’s gauge of consumer confidence fell to its lowest since January 2021 and expectations for the next six months were even gloomier, hitting a 12-year low. The University of Michigan’s consumer sentiment index declined for a fourth straight month to its lowest since January 2021. A separate survey of small businesses reflected more optimism but showed uncertainty at the second-highest level since the 1980s.
- Stocks sink amid heightened uncertainty: Stocks fell last month as investors pulled back ahead of new reciprocal tariffs, inflation concerns and in response to signs of further slowing in the economy. Less than six weeks removed from its all-time high, the S&P 500 ended March with its worst monthly percentage drop (-5.6%) since December 2022, leaving it down 8.3% from the February 19th all-time high and with a -4.3% return for 2025. Small-cap stocks deepened their losses for the year with a 6.8% setback. International stocks outperformed the U.S. for the third straight month while eking out a small gain (+0.2%).
Chart of Interest
Our Views
- The new reciprocal tariffs pose a major threat to financial markets and the economy if sustained long-term. Markets immediately sold off in response to tariffs that were worse than anticipated. If markets drop substantially further we would use the weakness as an opportunity to buy higher-risk assets. What comes next depends largely on how U.S. trading partners respond and Trump’s willingness to negotiate. We believe these tariffs are the president’s opening salvo and are set artificially high as a hard-nosed negotiating tactic. We suspect he also acted to bolster the case for tax cuts with reluctant lawmakers, who will be motivated to bring in additional revenue to offset the cost of the cuts and stimulate growth. Currently, the tariffs risk causing consumers and companies to pull back on spending the longer they are kept in place, as well as taking a toll on the global economy.
- A recession is increasingly possible the longer the trade war lasts. If one occurs, we do not expect it to be severe given the fundamental strength of the U.S. economy entering this period of turbulence. The labor market remains solid and the outlook for corporate profit growth, while clouded by tariff uncertainty, is still positive. While we now believe the Trump administration is willing to cause more economic pain than we initially thought, the president is unlikely to stand by idly as the economy deteriorates before the midterm elections next year. He would likely change course to right the path of the economy.
- International stocks’ outperformance in the first quarter highlighted the value of diversification at a time of extreme uncertainty in the markets. Returns of 8.1% for international developed stocks and 4.5% for emerging-markets stocks came at a time when U.S. stocks were down sharply, a change to the recent trend.
- Inflation may rise in the months ahead but we do not expect it to accelerate long-term. Any uptick in inflation should be short-lived because it would be accompanied with an economic slowdown, which is deflationary.
- The Federal Reserve will likely reduce interest rates at one of its next two meetings in May or June to mitigate the slowing economy and potential spending slowdown, even if inflation picks up temporarily. We anticipate two to three rate cuts by year-end, providing a boost to lending activity and economic growth.
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