Highlights:
· President Trump’s tariff rollout melted markets globally and dramatically raised the threat of a recession. The renewed trade war with China carries the biggest risk, with the world’s two largest economies engaged in a tit-for-tat escalation that could snarl global supply chains. China is more prepared for this trade war with the U.S. than they were during Trump’s first term.
· It will take some time to see what the ultimate impact of tariffs is on inflation, consumer spending, and global economic growth, but businesses and supply chains are certain to adapt if they believe this is more than a negotiation tactic by the Trump administration. Nevertheless, corporate America is bracing for the impact of trade becoming a political weapon.
· Red flags may be everywhere, but to this point, there is no hard data pointing to an imminent recession. Staying committed to a properly crafted investment policy is crucial during inevitable market downturns.
Commentary:
“There are decades when nothing happens; and there are weeks where decades happen.”
-Vladimir Lenin, Russian revolutionary, politician and political theorist
On April 2, 2025, President Donald Trump declared “Liberation Day” to mark the introduction of a new tariff policy aimed at enforcing trade reciprocity and seemingly upending globalization, as we knew it. The U.S., he said, will begin imposing tariffs that match the duties placed on American exports by other countries, with an initial baseline of 10%, while many nations will face additional reciprocal tariffs. Exactly one week later President Trump offered a 90-day reprieve on the reciprocal tariffs he had imposed on dozens of countries, but kept the baseline 10% tariff in place, as well as 25% tariffs on steel, aluminum, automobiles, and auto parts, and increased levies on Chinese goods to 145%. Just days later, apparently realizing that punishing U.S. companies for a supply chain they can’t yet replace would be self-sabotage, he took another step back by exempting smartphones, laptop computers, memory chips and other electronics from the reciprocal tariffs, including China. Commerce Secretary Howard Lutnick said these devices would face separate levies in the coming months as part of a trade investigation into semiconductors. To say this story is far from over would be a massive understatement.
The 90-day pause brought the policy in line with what many investors thought Trump would do in the first place. It also shifted a global trade war mostly into a U.S.-China trade war, which will still have huge impacts for U.S. businesses and consumers, with China imposing a retaliatory blanket tariff of 125% on American goods. In the 23 years since China joined the World Trade Organization, access to its cheap manufactured products has become embedded in the consumer-focused U.S. economy.
The tariffs threaten to undo the fragile recovery in corporate earnings, drive up consumer prices, and force businesses to rethink their supply chains overnight. While campaign rhetoric hinted at some protectionist measures, the scale and immediacy of tariff enforcements shocked investors who got spooked that the extent of the tariff measures, and the reciprocal tariffs by other countries that have and will likely continue to follow, will stoke inflation, undercut global growth and result in a fundamental reordering of the economy.
The White House, on the other hand, argues that the move will strengthen domestic industries, reduce the trade deficit, and correct what it sees as decades of unfair trade practices that have disadvantaged American workers and businesses. Despite arguments that say tariffs can reinvigorate manufacturing in the U.S., factories will not be able to rise up and fill the demand for goods that consumers and companies get from other countries overnight. Recruiting and training a manufacturing workforce with the economic might to make our goods more cheaply elsewhere and buy them in mass quantities takes much time and money. This is especially true for a country that has spent the last several decades becoming a service-based economy. This is not to even speak of the fact that even if we do see a manufacturing renaissance in the U.S., there are no guarantees that these will be well-paying jobs.
It will likely be some time before we know how this all turns out, and it is still possible this goes down as just another in the long line of President Trump’s hardball negotiating tactics. Nevertheless, for now, this move marks one of the most significant shifts in U.S. trade policies in generations, realizes a core pillar of Trump’s 2024 campaign, and may mark the start of a long trade war era rather than a short-lived spat.
If this is indeed the end of the free-trade era that has defined global commerce for decades, investors will need to reassess everything from manufacturing to consumer demand in light of this renewed trade instability. Prior to the tariff announcements, corporate profits and GDP growth were both strong, and companies felt confident enough to invest, hire, and return capital to shareholders. That is all up in the air now with tariffs set to hit supply chains and inflation remaining sticky. American consumers, who for decades have benefited from a constant flow of cheap goods manufactured around the world, will likely need to start finding U.S.-made substitutes or be prepared to pay more for many goods. The reason why lower value-add products are made overseas is because the cost of labor is much lower.
Barriers to open trade are rising across the world at a pace we have not seen in decades. It is not just President Trump’s extensive new tariffs, which have set off a barrage of retaliatory measures across Europe, China and Canada targeting hundreds of U.S. goods. Even before Trump was reelected, many countries were increasing trade barriers, often against China, as they tried to beat back a flood of cheap manufactured goods pressuring their homegrown industries.
Economists and historians say the flurry of recent moves suggest the world could be heading toward the largest surge in protectionist activity since the U.S. Smoot-Hawley Tariff Act of 1930 set off a global retreat behind tariff walls that lasted until after World War II. While economists do not think the world is headed for anything like the Great Depression of the 1930s, they do warn of lasting economic and diplomatic damages if tariffs and other hurdles to trade continue to increase. “Our old relationship of steadily deepening integration with United States is over,” Canadian Prime Minister Mark Carney said the day after President Trump’s tariff announcements. “The 80-year period when the United States embraced global economic leadership…is over. While this is a tragedy, it is also the new reality.”
The value of the U.S. dollar fell sharply post-tariff announcement on the fear that the U.S. may no longer serve its unique role in the global economy. For generations, the U.S. has embraced the dollar’s preeminence in the global financial system. This led to cheaper government borrowing and allowed the U.S. to bolster defense spending, financed in large part by foreign investors, who hold about a third of U.S. debt. The Trump administration appears to be upending this policy, making it clear that they want to expend fewer resources protecting allies and they want a weaker currency to boost domestic manufacturing by making goods cheaper to foreign buyers. However, a weaker dollar would make imports more expensive, boost inflation, and make it harder for the Federal Reserve to cut interest rates.
The immediate concern is that the speed of the Trump administration’s policy swings makes it harder for businesses to plan long-term investments, price contracts, and stabilize supply chains. The era of predictable trade agreements appears to be over, and multinational companies must now assume that tariffs, policy shifts, and retaliatory measures are now routine weapons in economic diplomacy. The Trump Administration argues that a detox might be needed in spending and hiring, that falling stock values are not a big worry, and that inflation could rise, but only in the short run.
Scott Bessent, U.S. Secretary of the Treasury, got right to the point when he said, “I’ve been in the investment business for 35 years. And I can tell you that corrections are healthy. They’re normal. What’s not healthy is straight-up – that is euphoric markets. That’s how you get a financial crisis. It would have been healthier if someone had put the brakes on in 06-07. We wouldn’t have had the problems in ’08. So, I’m not worried about the markets. Over the long term, if we put good tax policy in place, deregulation, and energy security, the markets will do great.”
Usually, if the economy starts to worsen, fiscal stimulus action and interest rate cuts from the Fed can be counted on to buffer the impact. This time around though the Fed may not be willing or able to cut rates significantly because inflation has already been well above its target for four straight years and a tariff war stands to present headwinds that are even more inflationary.
Investors who are increasingly concerned that tariffs and general economic chaos will cause stagflation will need to hope that the Trump Administration changes its attitude quickly. Stagflation – stagnant growth mixed with elevated inflation – is particularly painful because it couples lack of job opportunities with higher prices. It also leaves the Fed with fewer response options because a move that is intended to address one side of the problem could worsen the other.
The job market is already quickly shifting gears. After years of tight labor conditions favoring workers, the pendulum is starting to swing back toward employers. Slower job growth and cooling wages suggest a new phase of the economic cycle where companies regain negotiating power and workers face tougher job markets. For the last several years the Fed has been trying to orchestrate a soft landing, but the policies of the new administration stands to upend that effort. If hiring decelerates further in the coming months it could be a strong indicator that the era of cheap money and labor shortages is ending.
As pay growth moderates, household purchasing power could start to erode, just as tariffs threaten to push prices higher. If this trend continues, it risks weakening consumer spending, which is the engine of the U.S. economy. The labor market is far from falling apart, but slowing wage growth appears to indicate that workers no longer have the upper hand they had the past few years, and that shift could potentially ripple through the economy in the months ahead.
China faces sharp near-term economic pain because of the high stakes game of tariff chicken they are currently playing with the U.S. But longer term China is likely to try to position themselves as a stable, pro-trade, pro-globalization global power. China was unprepared when Trump launched a trade war during his first term. Its counterstrategy of imposing reciprocal tariffs on American goods was limited because China imports far less from the U.S. than the U.S. imports from China.
However, in the years since, China appears to have learned its lesson and built its own arsenal of economic weapons and enacted a raft of new laws that give it the power to impose penalties ranging from targeted sanctions to full-fledged embargoes. It has also painstakingly identified chokepoints in global supply chains, starting with critical minerals that American companies use to make chips and defense-related products, which it can weaponize with devastating effect to hit America where it hurts. Other tools include regulatory investigations designed to intimidate and penalize U.S. companies, blacklists intended to bar U.S. businesses from selling to China, and pressuring American companies to give up their intellectual property or lose access to the Chinese market.
In retaliation to escalating U.S. tariffs, China has restricted outbound investment into American firms, targeting industries like tech, AI, semiconductors, and data infrastructure. The move towards capital controls marks a significant escalation in economic tensions with the U.S., and appears to be a strategic pivot by China towards a long-term decoupling from the U.S., whom they believe they are no longer reliant on for its exports. “If war is what the U.S. wants, be it a tariff war, a trade war or any other type of war, we’re ready to fight till the end, Chinese Foreign Ministry spokesman Lin Jian said defiantly. “Intimidation does not scare us. Bullying does not work on us. Pressuring, coercion or threats are not the right way of dealing with China. Anyone using maximum pressure on China is picking the wrong guy.”
China is also committed to boosting spending at home in an effort to rebalance the world’s second largest economy. Amid the escalating trade conflict with the U.S., it is more critical than ever for China to find an alternative to exports as a driver of economic growth. In the near term though, Chinese policymakers will likely need to step up stimulus efforts in response to the escalating trade conflict with the U.S. In this regard, four of China’s largest state-owned banks announced plans during the quarter to raise a combined $72 billion in an effort to resuscitate China’s ailing economy.
The fundraising, which will be done through share sales to investors, represents a rare government-directed injection of capital that is aimed at bolstering lending to prop up the country’s ailing property sector.
Elsewhere, the European Central Bank (ECB), awakening to the reality that the long-standing assumption that global trade would be a stable growth engine to its export-oriented economy no longer holds, reduced its benchmark rate by 50 basis points to 2.5% during the quarter. The cuts are an attempt to counteract economic headwinds from escalating trade tensions with the U.S., the continent’s biggest export destination, that threaten to weigh on European businesses. ECB President Christine Lagarde emphasized that trade uncertainty is dampening corporate investment, hiring, and consumer confidence across the Eurozone. “We have huge uncertainty...some people have used the adjective ‘phenomenal’ uncertainty,” Lagarde said. Tariffs “are negative on pretty much all accounts.”
Likewise, the Bank of England (BOE) halved its growth forecast for the year during the quarter and cut interest rates to the lowest level in the last 18 months. BOE governor Andrew Bailey said that rates remain on a downward path “but we will have to judge meeting by meeting, how far and how fast.” Britain is very familiar with a policy designed to erect walls around one’s self, as President Trump seems hell bent on doing in the United States. Britain embarked on a similar experiment in economic isolationism when it voted to leave the European Union in 2016 (“Brexit”), and break ties with its biggest trading partner in the process. Some economists consider Brexit one of the greatest acts of economic self-harm by a Western country in the post-World War II era as the drag on the British economy has become quite clear at this point.
In Canada, Justin Trudeau announced his resignation and Mark Carney, leader of the Liberal Party and former central banker of Canada and England, was elected as Canada’s next prime minister. Liberals are enjoying a polling surge amid rising anti-Trump sentiment over tariffs, and Carney immediately vowed to win the trade war. “These are dark days brought on by a country we can no longer trust,” he said. “America is not Canada. And Canada never, ever will be part of America in any way, shape or form…We didn’t ask for this fight. But Canadians are always ready when someone else drops the gloves.”
Japan’s central bank increased the cost of borrowing to its highest level in 17 years after seeing consumer prices accelerate at the fastest pace in 16 months. The move by the Bank of Japan (BOJ) to raise its short-term policy rate to 0.5% got the BOJ closer to its target rate of 1%, which is a level it sees as neither boosting nor slowing the economy. By raising rates, the BOJ will have more scope to cut rates in the future if it needs to boost the economy, a move that now looks prescient in light of President Trump’s tariffs that will affect Japan’s export-driven economy.
Red flags may be everywhere, but to date there is no concrete evidence that the economy is in recession, or even particularly close to it. The evidence to this point is all in soft data like consumer and business confidence surveys and financial markets, as opposed to the definitive hard data evidence of a downturn that would make economists believe a recession is beginning. While it may be frightening how pervasive the warning signs have been lately, it does not mean a recession is underway or even inevitable and it remains to be seen how businesses and supply chains adapt to these tariffs. It also remains to be seen how much of the tariffs will stick following negotiations, whether governments will provide fiscal support, and the lasting effects on global growth and inflation. One potential bullish sign and reassuring sign for investors is that corporate insiders have been buying their own stocks at close to the highest rate since late 2023 and kept buying at an elevated clip during the market rout in early April.
There are many differences between this sell-off and past sell-offs, but the biggest difference is that we know how past crises ended while this one is open-ended as of the writing of this commentary. We have the benefit of hindsight with past crises to see they were great buying opportunities even though they did not feel that way at the time. It might not seem like it now, but this crisis will also eventually end. Businesses will continue to find a way to produce and sell goods and services at a profit. There is no telling how long this will go on, but long-term investors that stay the course still have a high probability of being rewarded for their patience and steadfast commitment to their investment policies. As J.P. Morgan once said, “In bear markets, stocks return to their rightful owners.”
Urban Financial Advisory Corporation – April 2025
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