President Trump’s April 2nd “Liberation Day” tariff announcements certainly liberated financial market volatility. The Bloomberg 500 Index returned -0.45% in April, but that modest decline belies a wild interim ride[1]. After initially rising on the day of the announcements, stocks fell over the next four sessions by more than 12% before a 9.6% positive one day reversal on April 9th when the White House abruptly announced a 90 day pause on reciprocal tariffs for most countries, excluding China[1]. The Bloomberg 2000 Index fared worse, suffering a post-Liberation Day selloff before rebounding to finish the month with a return of -2.66%[1].
But it was not just stocks that saw volatility spike. Bonds and the US Dollar also saw increased volatility in April. The 10-year Treasury yield stood at 4.17% on April 1st[1]. Initially, yields fell after the tariff announcements on increased recession fears. Then the inflation narrative resurfaced, and investors sold both treasuries and dollars while leveraged hedge funds unwound long positions. By April 11th, the 10-year Treasury yield had jumped to 4.49% before gradually easing to finish the month at 4.16%, below where it stood on March 31st[1]. Credit spreads widened in April but remain historically tight. The USD lost ground steadily in April, with the Dollar Index falling -4.5% to 99.5, leaving it down -8.3% YTD[1]. Gold rose for the fourth month in a row, bringing its YTD gain to 25.3% on persistent central bank buying and its appeal as a safe haven in times of increased financial and economic risk[1].
Much of the talk was that foreign countries, especially China, were liquidating their US Treasury bond holdings and repatriating dollars into their local currency to hold as reserves in anticipation of lower expected trade with the US. There is likely some truth to that, but China has been reducing their US foreign reserve holdings for some time. There is also speculation that, in retaliation for Trump’s unprecedented tariff policy, major trading partners and global investors generally have taken on an anti-US posture. Again, that may be the case right now as emotions run high but, ultimately, economics will win out and the rest of the world can hardly ignore the largest consumer market on the planet.
While Team Trump negotiates global trade agreements, our immediate concern is the impact on the domestic economy given the high degree of uncertainty induced by frequent movement of the goalposts. There are indications that businesses may have pulled orders forward and that consumers made purchases before expected price hikes hit. Reports of ships and containers piling up at Chinese ports and even some factory closings are becoming more widespread, while the Port of Los Angeles is already beginning to see lower inbound container traffic. Amazon resellers reportedly are already raising prices. We may well find ourselves in the dreaded “Stagflation” zone by summer if we are not already there.
Whether tariffs ultimately turn out to be inflationary or not in the long run, in the near-term higher prices and/or shortages of some goods are likely or are at least anticipated. The latest University of Michigan Sentiment readings showed 1-year inflation expectations at 6.5% and 5-10 years at 4.4%, both well above the Federal Reserve’s comfort level and the “anchoring” of inflation expectations is frequently mentioned by the Fed[1]. Any initial inflationary impulse from tariffs will make it harder to cut interest rates to offset weaker economic activity.
The Conference Board’s US Leading Economic Index for March fell -0.7%[1]. We do not think the impact of “Liberation Day” is fully reflected in most of the hard economic data, yet the initial estimate of first quarter GDP showed a slight contraction of -0.3% annualized as net exports were deeply negative – validating suspicions that businesses scrambled to pull orders forward ahead of tariffs[1]. Personal Consumption Expenditures (PCE) came in better than expected but slowed materially from the prior quarter, while the Core PCE Price Index came in at 3.5% YoY, above expectations and up sharply from the prior quarter[1]. The unemployment rate held steady at 4.2% in April, but Initial Unemployment Claims have been creeping higher and, despite better-than-expected April non-farm payrolls, new job creation has been below the key 200k level every month this year[1].
The first 100 days of Trump 2.0 have been a whirlwind of activity. In both domestic and foreign policy, Team Trump is arguably pursuing the most ambitious task list undertaken by a new administration in decades. It is unrealistic to expect everything to go right. The war in Ukraine remains unresolved, as does the Gaza Strip situation. We are in talks with Iran, which seem promising though details are sparse. Trump’s designs on the Panama Canal and Greenland appear serious notwithstanding his bombastic approach. Trump has unquestionably ruffled some feathers, not just in China but (to some degree) among longtime allies like Canada, and certainly in the federal bureaucracy through the elimination of agencies, layoffs and DOGE’s efforts to root out waste and corruption.
There is plenty to second-guess about the Trump administration’s efforts so far. Still, key positive economic policy initiatives expected from a second Trump presidency remain in play; namely less regulation and extended tax cuts. Success in those areas will go a long way in offsetting negative impacts from an aggressive tariff policy. For markets, it is an unfortunate reality that any given day could bring an unexpected policy announcement, a new idea might be “floated,” or Trump may simply change his mind. How much of this is purposeful versus haphazard is debatable. Either way, for investors, it makes for challenging times, indeed.
Buckle-up!
[1] Source: Bloomberg