Tariffs and Markets

Last quarter, global stocks went down a bit more than 1%.¹ Within equities, however, we saw a large and surprising return distribution. Among the major stock asset classes, foreign-value stocks did the best, returning more than 11%.² In contrast, US small-growth companies fared the worst, dropping more than 11% in the quarter. Bonds did provide some cushion as the US bond market rose almost 3%.³

What’s new is that, overall, foreign stocks did better than US stocks: the S&P 500, a common US market proxy, went down more than 4% in the quarter, while foreign-developed stocks rose nearly 7%.⁴ Moreover, in the US, value companies did better than the S&P 500’s growth companies: large-value stocks rose 2%.⁵

As we have discussed in the past, large and growthy companies have had such a run over the past few years that they reached near-record price multiples. It’s not a surprise they have come back down to Earth a bit. The so-called Magnificent Seven stocks, those that dominated markets and headlines over the last couple of years, dropped more than 15% on average during the quarter.⁶ The Q1 tariffs hit these companies hard as many of them rely on cheap goods and/or services from abroad.

It seems quaint today, but last quarter’s returns reflected investor concerns about sticky inflation and whether the Trump Administration’s initial tariffs might contribute to the problem. In February and March, President Trump announced tariffs on Mexico, Canada, and China.⁷ Those first-quarter tariffs now seem paltry compared to what was to come the first week of April.

What are tariffs?

Before we delve into April’s events, we’ll briefly explain what a tariff is. A tariff is a tax placed on goods by the importing country. Tariffs can cover specific goods or entire industries or countries. In the United States, the president generally has wide latitude to impose or remove tariffs.

Let’s take an example close to our heart: coffee. Imagine a South American coffee exporter plans to sell coffee beans in the United States. In our hypothetical, the exporter charges $10 for a half-pound bag of beans. The United States, however, has a 20% tariff on South American coffee beans. The retail price would then be $12 ($10 + the tariff).

That’s primarily how tariffs raise prices, i.e., contribute to inflation. There are also secondary effects. Businesses not subject to tariffs also raise their prices. A savvy coffee-bean seller that uses domestic beans can raise their price from $10 to $11 (or $11.99) and still be cheaper than the South American beans. Moreover, coffee beans are an input to many other goods. If beans rise in price, so will lattes, red-eye gravy, and mocha cheesecakes.

“Liberation Day”

Although the President imposed several tariffs during the first quarter, equity markets responded most jarringly to two April announcements. The first announcement, coined by President Trump as “Liberation Day,” took place on April 2.⁸

That day, the President announced a 10% tariff on all imports and higher rates on dozens of individual countries, the highest being a 34 percent tax on Chinese imports.  In the two days following the announcement, global stocks cratered about 10%.⁹

We believe three factors contributed to the market rout. First, the tariffs were much higher and broader than most investors and analysts anticipated.¹⁰ By including virtually every product from every country, President Trump essentially guaranteed (1) higher prices across the board for American consumers, (2) significantly less global trade, and (3) retaliatory tariffs and/or a trade war.

Second, it didn’t appear the Administration was careful in its tariff plan: the US imposed tariffs virtually everywhere, including some uninhabited islands near Antarctica.¹¹ Most investors and analysts view tariffs as a tool to protect domestic industries and/or to influence other countries’ economic behavior. They raise prices and tend to be costly, but eventually tariffs may have positive economic impacts. That’s assuming, however, we impose tariffs in a thoughtful manner.

Unfortunately, “Liberation Day,” in our opinion, was something shy of thoughtful. For example, President Trump imposed a 32% tariff on imported coffee beans from Indonesia.¹² If we seek to protect domestic coffee-bean growers, this might make sense. But the US doesn’t have the climate for much bean growing. We import approximately 99% of our coffee beans.¹³ Moreover, we export nearly no beans to Indonesia. Thus, we won’t enjoy the potential good outcomes from a coffee-bean tariff (higher domestic protection and exports). We will just have to pay more for our Starbucks Sumatra K-Cups.

To us, imposing tariffs is similar to starting chemotherapy. We know the treatment will hurt us in the short term. But we endure those short-term symptoms because there’s a reasonable chance that, eventually, the treatment will help make us better. Unfortunately, slapdash tariffs are akin to undergoing chemotherapy without a cancer diagnosis. There’s no long-term benefits, it just makes our body sicker.

Third, the Administration based these “reciprocal” tariffs not on current tariff levels faced by US products but rather based on the current trade surplus or deficit with the entire country.¹⁴ A high trade deficit for the US means we buy more goods and/or services from the foreign country than they buy from us. But that’s not necessarily a bad thing: American consumers can benefit when US companies import inexpensive goods (e.g. fabric and microchips) and turn them into higher value products (e.g. suits and phones). Thus, when first announced, it appeared the Trump Administration perhaps didn’t understand international trade.

Investors found the underlying assumption even more concerning: the view that international trade itself is bad. Most big companies today rely on relatively inexpensive global “supply chains” to provide their goods and services. The tariffs could cause a radical change in supply chains, raising costs and lowering output.

The Retraction

A week later, on April 9, President Trump announced a three-month “pause” on most of the tariffs. That day, markets rallied and global stocks rose more than 9%.¹⁵ Unfortunately, stocks are still trending down for the year.

The reason? President Trump’s retraction arguably created more uncertainty. As we noted above, most companies today rely on global supply chains. The tariffs will likely change those, perhaps dramatically. But announcing and then retracting the tariffs may raise more concerns over the long term.

For example, imagine a tech company importing microchips from China. Current tariffs dramatically raise the price of chips leading to reduced sales, lower profits, or both. Most likely, the company will be better off in the long run by making its own chips. But there aren’t lots of microchip factories sitting idle. The company would have to build or retrofit a factory for their needs. That will likely take many months and lots of money.

But it’s not clear how long the US will impose tariffs on China at these levels. A worst-case scenario is our hypothetical company spends time and money to make chips just as the Administration reduces or eliminates the tariffs. Smart companies, thus, will likely delay any business investment until they are more confident in the status quo. In this case, retracting the tariffs so quickly may actually reduce economic activity.

Conclusion: Double Whammy

As of this writing, April 24, global equities have regained more than half of the “Liberation Day” drop and are down a rather modest 3.5% for the year, as the chart below shows. As we’ve discussed before, the average intra-year drop for stocks, in good times and bad, is about 15%. The volatility over the first four months of the year, thus, is very consistent with markets past. So why does this feel so bad to so many?

We believe two factors make this year’s market feel worse than usual. First, a perceived lack of planning by our economic decision-makers. Regardless of whether we agree politically with a particular presidential administration, we typically have a sense that competent people are working to affect a master plan. It’s not clear that’s true today. Investors feel rattled by the combination of questionable policy, sudden reversals, and shifting explanations. Markets like stability and that’s currently missing.

Compounding these financial worries are worries about our personal and civil rights. The second Trump Administration has been very aggressive at expanding its power and slashing the federal workforce. Across the political spectrum, people were shocked at masked federal agents arresting people on the street. Seniors are having trouble calling the Social Security Administration. The Trump Administration erroneously fired people directly responsible for managing our nuclear weapons.

We believe this combination – worries regarding financial and personal safety – is driving today’s grim market sentiment.

For better or worse, we have faced times like this before. In the past 25 years, we’ve weathered three events when it felt like more than our financial safety was at risk. In 2001, during the tech-bubble bear market, America suffered a terrorist attack in New York. The 2008 financial crisis was sparked by a collapsing housing market. At the time, people worried about losing their homes as well as their stock gains. And in 2020, we self-quarantined at home to avoid a deadly COVID virus while watching our stock portfolios drop.

We don’t have magic words to make these times any less difficult. But we believe that being aware of our feelings can help us make better decisions, both personal and financial. When we feel most threatened, it’s most important to remember to control what we can: our own thoughts and actions. As always, please let us know how we can best help you as we navigate some very rough waters.

[1] Global stocks represented by the MSCI ACWI Index (Net). All investment returns from Morningstar unless otherwise noted. Past performance is no guarantee of future results.

[2] Foreign-value stocks represented by the MSCI EAFE Value Index (Net) and US small-growth stocks represented by the Russell 2000 Growth Index.

[3] US Bonds represented by the Bloomberg US Aggregate Bond Index.

[4] Foreign stocks represented by the MSCI EAFE Index (Net).

[5] US Large-Value Stocks Represented by the Russell 1000 Value Index.

[6] See., e.g., returns for Roundhill Magnificent Seven ETF, designed to track the seven underlying stocks: Microsoft, Google, Apple, Nvidia, Amazon, Tesla, and Meta. We do not necessarily recommend this investment vehicle.

[7] See, e.g., Grantham-Philips, “A timeline of Trump’s tariff actions so far,” PRS.org, April 10, 2025.

[8] Ibid.

[9] Yahoo! Finance.

[10] See, e.g., Brady, “Trump’s ‘Liberation Day’ tariffs were worse than expected – sparking a global selloff, Fortune, April 3, 2025.

[11] Nowhere on Earth is safe: Trump imposes tariffs on uninhabited islands near Antarctica, The Guardian, April 2, 2025.

[12] Cerullo, Here’s why your cup of coffee could cost even more, CBSnews.com, April 14, 2025.

[13] Ibid.

[14] Goldman, This is the dubious way Trump calculated his ‘reciprocal’ tariffs. CNN.com, April 3, 2025.

[15] Yahoo! Finance.

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