Institute Alert

• Last week’s trading saw escalating U.S.-China trade tension, as well as a rare and concerning combination of market moves across fixed income, the U.S. dollar, and equities.
• As a sign of the continuing uncertainties, on Friday evening, April 11, President Donald J Trump exempted imported electronics from tariffs, but two days later added that the reprieve is temporary, while his administration formulates a separate, sectoral tariff for these goods and semiconductors.

• We see an opportunity for long-term investors to add exposure to high quality U.S. Large Cap and Mid Cap stocks, and to the Communication Services, Energy, Financials, and Information Technology sectors.
• Investors should remain cautious on lower-quality areas like U.S. Small Caps and Emerging Market Equities.

Financial markets welcomed last week’s 90-day pause on most reciprocal tariffs, but signs continue to emerge that tariff uncertainty is set to continue, even during the pause. The trade war with China escalated. U.S. tariffs against China were increased to 145% and China retaliated by raising tariffs on U.S. imports to 125%. U.S. universal tariffs of 10% remain, but the European Union delayed implementation of retaliatory tariffs against the U.S. for 90 days.

Separately, another sign of the continuing uncertainties, on Friday evening, April 11, President Donald J Trump exempted imported electronics from tariffs, but two days later clarified that the reprieve is temporary, while his administration formulates a separate, sectoral tariff for these goods and semiconductors.¹

The still-evolving policy environment help drive a continuing combination of market moves across fixed income, the U.S. dollar, and equities. After a record rally on Wednesday, U.S. equities were mixed in the balance of the week, while the 10-year U.S. Treasury bond yield rose and the U.S. dollar slid to a three-year low against a basket of global currencies. Futures markets early on Monday morning pointed to equity gains, lower Treasury yields and a lower exchange value for the U.S. dollar.

The U.S. dollar moving lower opposite higher bond yields is unusual with any magnitude. The U.S. dollar depreciated more than 1.5% while the 30-year U.S. Treasury yield rose by 10 basis points (.10) only four times in the last 30 years. The world's reserve currency almost always appreciates during market stress moments.

Any sustained environment of a lower U.S. dollar, lower bond prices, and lower equity prices suggests to us capital outflow from U.S. assets. We believe it reflects evaporating U.S. growth exceptionalism and reduced attraction at the margin for dollar assets for reserve purposes amid erratic U.S. decision-making. Similar behavior occurred in 2022 in the U.K when Liz Truss attempted to pass an untenable budget that created market chaos and led to her serving as U.K. Prime Minister for a mere 44 days. To be clear, the U.S. is not the U.K., but we do see some disturbing parallels.

What is not clear, in our view, is the administration’s understanding of the important relationship between the U.S. current account (the balance of trade and income flows between the U.S. and the rest of the world) and its capital account (the balance of capital flows between the U.S. and other countries. If the administration succeeds in reducing U.S. trade deficits, demand for dollar-denominated assets would decline markedly. Foreigners historically have taken U.S. dollars paid for their goods and bought U.S. stocks, bonds, or other assets. If they don’t receive those dollars, there is simply less international demand for dollar-denominated assets, which may reduce prices for these assets.

Forcing equilibrium of trade deficits would shift global trade and by extension shift global demand lower. It is not a zero-sum game nor is it a bilateral negotiation from one country to another. It is a multilateral, complex trade network that, in our view, needs to be acknowledged as such.

We believe markets are clearly pushing for some form of durable footing and a larger turn from the trade and tariff reset. A complete cessation of tariffs even ex-China would be a welcome reprieve, in our view, although an unlikely probability today. Some form of negotiation with China — or at least a change in baseline of the rapid “food-fight” deterioration in the U.S.-China geopolitical relationship (given these are clearly the two most important economic powers in the globe) — would also serve as encouragement for market participants.

The problem markets are wrestling with today, in our view, is the Trump administration has conflicting priorities and difficult time-horizon mismatches between geopolitical ambitions and economic and market outcomes. To find the equilibrium markets are craving, we believe the administration will need to demonstrate flexibility and more clearly define its strategic objectives.

Even a baseline 10% tariff rate, along with other product-specific tariffs, implies higher inflation, slower demand, and weaker corporate profits, which pressures equity valuations. Specifically, tariffs against China will raise consumer prices, disproportionately hurting low-income consumers. Sky-high uncertainty creates downside risk.

Stepping back from the day-to-day volatility for a minute, this is simply an extraordinary moment. We will look back years from now and realize this was a transformational moment when geopolitics, trade, global security accords, and accelerated de-globalization all collided at once, resetting the global order. Is it any wonder that financial markets are serving as the real-time transmission mechanism for these events?

For investors who have cash and want to take advantage of lower prices, even amid uncertainty, we would stick with quality. Our favorable rating on Commodities may help hedge against potential inflation effects.

Our equity guidance prioritizes quality, while our fixed-income guidance emphasizes selectivity. International economies depend more on trade than does the U.S. economy, so we favor U.S. equities. Among the U.S. markets, we favor U.S. Large Cap and Mid Cap Equities and select sectors (Information Technology, Communication Services, Financials, and Energy). We also favor investment-grade fixed income and would focus on corporate bonds and essential-service municipal securities. In our view, the middle range (3 to 7 years) offers the best value at this time, in our view.

For investors who have a long-term focus and want to remain cautious here, some buffer can make sense. Money market rates are a lot higher than they were the last time major uncertainty landed on financial markets, at the beginning of the COVID lockdowns. So, for now, rates above 3% are one solution. As prices settle, legging back into financial markets, especially if underweight to strategic targets, remains a priority.  

¹ Josh Wingrove, “Trump Says He Will Look at ‘Whole Electronic Supply Chain’”, Bloomberg, April 13, 2025.

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Foreign investing has additional risks including those associated with currency fluctuation, political and economic instability, and different accounting standards. These risks are heightened in emerging markets. Small- and mid-cap stocks are generally more volatile, subject to greater risks and are less liquid than large company stocks. Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates. High yield (junk) bonds have lower credit ratings and are subject to greater risk of default and greater principal risk. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investing in a volatile and uncertain commodities market may cause a portfolio to rapidly increase or decrease in value which may result in greater share price volatility.

Sector investing can be more volatile than investments that are broadly diversified over numerous sectors of the economy and will increase a portfolio’s vulnerability to any single economic, political, or regulatory development affecting the sector. This can result in greater price volatility. Communication services companies are vulnerable to their products and services becoming outdated because of technological advancement and the innovation of competitors. Companies in the communication services sector may also be affected by rapid technology changes; pricing competition, large equipment upgrades, substantial capital requirements and government regulation and approval of products and services. In addition, companies within the industry may invest heavily in research and development which is not guaranteed to lead to successful implementation of the proposed product. The Energy sector may be adversely affected by changes in worldwide energy prices, exploration, production spending, government regulation, and changes in exchange rates, depletion of natural resources, and risks that arise from extreme weather conditions. Investing in the Financial services companies will subject an investment to adverse economic or regulatory occurrences affecting the sector. Risks associated with the Technology sector include increased competition from domestic and international companies, unexpected changes in demand, regulatory actions, technical problems with key products, and the departure of key members of management. Technology and Internet-related stocks, especially smaller, less-seasoned companies, tend to be more volatile than the overall market.

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