Institute Alert

• We remain in the early innings of this global trade regime change, and while the 90-day pause on reciprocal tariffs temporarily reversed the market selloff, it does prolong uncertainty.
• Meanwhile, economic data is cooling, company guidance has become cautious, and it’s unclear if the Federal Reserve (Fed) can immediately salvage weakening growth.

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

On April 9, President Donald Trump announced a 90-day pause on most of the reciprocal tariffs announced on April 2. Countries with higher reciprocal tariffs will now be taxed at the earlier 10% universal tariff baseline rate applied to other nations, except for China.

With China retaliating by substantially raising tariffs on U.S. imports, the Trump administration increased tariffs to 125% on April 9 and to 145% on April 10. U.S. tariffs on steel, aluminum, and automobiles remain at their current rates. Tariffs on Canadian and Mexican goods will also remain the same. The European Union (EU) approved its first set of tariffs starting April 15. However, in response to President Trump’s delay, the EU announced its own 90-day pause in an effort to provide time to negotiate with the U.S.

While we are encouraged by the 90-day delay in reciprocal tariffs, it does prolong trade policy uncertainty. Taken at face value, the combination of increased tariffs on China and reduced reciprocal tariffs will mean only slightly lower tariffs in total U.S. dollar amounts. China tariffs may also eventually be negotiated lower; however, tensions remain high now between the two largest economies on the planet. The distribution of tariffs also matters for markets.

Assuming just 10% universal tariffs and assuming around 50% China tariffs (if negotiated lower, which remains a big “if”), the reduction in domestic spending could be large enough that earnings growth will need to be revised lower. The gap remains narrow between a slower growth environment and an outright downturn in the global economy. While recession risks have risen, we believe a soft patch followed by a second-half recovery is more likely.

The administration's abrupt change of course before the S&P 500 Index sustained a bear market (down 20% from the February 19 peak), and before any funding problems could emerge, was critically important and well received by the markets. It proves the president isn't as impervious to market pain as it may have appeared initially. We believe the pause significantly thins out the worst-case scenario outcomes, but volatility could be with us for some time.

To be clear, we believe we remain in the early innings of this global trade regime change. Even with a tame March Consumer Price Index inflation report on April 10, it's not clear that the markets should rely on the Fed to salvage growth weakness immediately. Minutes from the latest Fed meeting suggest the committee remains more worried about tariff-induced inflation persistence. It is likely to err on the side of being reactive rather than proactive.

From a market perspective, the April 9 rally marked the strongest internal showing for equity markets since late 2018. The massive one-day advance ranks third since 1950 at 9.5% for the S&P 500 Index, but it's flanked by a batch of uncomfortable observations from both 2008 and 2001 – 2002. Big lows need big breadth and April 9’s action certainly exhibited this characteristic. That’s the good news. The challenge is excessive volatility historically has been a bear market characteristic, not a bull market characteristic. The selloff in equity markets on April 10 was emblematic of concerns over the global reset of the overall effective tariff rate and continued escalating tensions between China and the U.S. We see near-term support for the S&P 500 Index near current levels but emphasize that typically a retest follows between one and three months after the initial fall. We expect a more formidable uptrend — but not right away. Not coincidentally, the tariff pause rests at 90 days.

Although we’ve seen some signs of bottoming this week, we believe more volatility and consolidation could lie ahead. There could be potential selling leading up to Tax Day on April 15. Earnings season also ramps up in the coming weeks and, while first-quarter results were likely unscathed by the tariffs, outlooks are at risk given the high level of uncertainty. In addition, seasonality turns a little less positive going into the summer and fall months. At that point, however, the narrative could pivot from tariffs to lower taxes and deregulation, which should provide support for the markets, economy, and earnings in the second half of the year.

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 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.

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. Income from municipal securities is generally free from federal taxes and state taxes for residents of the issuing state. While the interest income is tax-free, capital gains, if any, will be subject to taxes. Income for some investors may be subject to the federal Alternative Minimum Tax (AMT). 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.

Cash alternatives typically offer lower rates of return than longer-term equity or fixed-income securities and provide a level of liquidity and price stability generally not available to these investments. Some examples of cash alternatives include: Bank certificates of deposit; bank money market accounts; bankers’ acceptances, federal agency short-term securities, money market mutual funds, Treasury bills, ultra-short bond mutual funds or exchange-traded funds and variable rate demand notes. Each type of cash alternatives has advantages and disadvantages which should be discussed with your financial advisor before investing.

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.

An index is unmanaged and not available for direct investment.

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