President Trump’s Liberation Day

Stocks tumbled in the wake of President Trump’s “Liberation Day” trade policy announcement on Wednesday. Since then, the Dow is off by 7.7%, and the S&P 500 is down 8.6%. Small & mid-caps, as well as the tech-heavy Nasdaq have been punished even more. On the other hand, bonds rallied, pushing interest yields sharply lower. Treasuries, considered a safe haven in times of uncertainty, rallied the most. The iShares 20+ Year Treasury Bond Fund (TLT) gained 2.5% over the last two days and is now up over 7% year-to-date.

President Trump declared a national emergency with regard to the US trade deficit, allowing him additional authority to impose trade tariffs. He announced a minimum tax of 10% on all goods imported to the US starting April 5. Countries which impose trade barriers on US goods, and those that foster large trade surpluses with the US, will face much higher levies. For example, the president imposed a 46% tariff on goods imported from Vietnam, 34% on China, 32% on Taiwan, 26% on India, 25% on South Korea, 25% on Japan, and 20% on the European Union.

The administration’s oft-repeated goals are to bring manufacturing back to the US, force trade partners to cut their own tariffs, and raise tax revenue. But despite repeated warnings about more aggressive trade policy, the final announcement came as a shock to investors and business leaders because the numbers are significantly larger than anyone expected. This new policy will almost certainly have a negative impact on corporate earnings, inflation, and the overall economy.

That said, Wednesday’s announcement shouldn’t be viewed as the final word on trade tariffs. The president did indicate some flexibility, saying that US tariffs could be reduced if foreign governments agree to lower their own existing trade barriers. So there it is. Who will blink first, and when? European Union President Ursula von der Leyen said that while the EU is preparing a package of tariff countermeasures, she will wait to see if a new trade deal can be reached before imposing them. Most other countries—with the notable exception of China—reacted in similar fashion. As former Treasury Secretary Steve Mnuchin said, “I’m hopeful that [the larger tariffs] will be negotiated down.”

We remain hopeful as well but recognize that in an environment long on fear and short on fact, it is incredibly difficult to predict the outcome with any confidence. The key factor is time. The longer this trade war drags out, the more damage is done to the global economy. So we’ll pay close attention to assess progress on bilateral negotiations

In a speech this morning, Federal Reserve Chair Jerome Powell echoed that sentiment. Uttering the word “uncertainty” repeatedly, he said the Fed needs more time to assess whether and how monetary policy should be adjusted to deal with this new challenge. But while he “feels like we don’t need to be in a hurry” to lower interest rates, President Trump vehemently disagreed. He told reporters that the Fed needs to cut rates now and “stop playing politics.”

Some of yesterday’s stock market decline was a knee-jerk reaction to fear. As long-term investors, we know trading based on emotion is a fool’s game. We studiously avoid trying to “time” market peaks and troughs. However, we must recognize that the stock market is facing a new headwind. Uncertainty over the economy’s growth trajectory is higher than it has been since the summer of 2022. And that means higher risk for the stock market in 2025.

As the year began we trimmed equity exposure and increased fixed income for some of our moderate-to-conservative investment strategies. For our stock-based strategies we trimmed companies like Apple, Caterpillar, Honeywell and Target. This was done because we felt less confident in the outlook for growth than we did back in early 2023 or 2024. In addition, we wanted to reduce exposure to areas especially vulnerable to another trade war. Post-Liberation Day, we are again paring back risk. Here again, our investment strategy adjustments are a response to what we see as a change in the overall climate for investing. Yesterday’s tariff announcement suggests we shouldn’t bank on a quick and tidy resolution to this new trade war.