Transcript

Amada Agati:  

Never did I think when I chose the song Purple Haze by Jimi Hendrix that it would become such a prescient choice for 2025!  We knew fiscal policy uncertainty was going to be a primary focus for markets, but as Metallica sings and Q1 demonstrated, Nothing Else Matters!  In this edition of Adding Alpha, we offer some thoughts on tariff policy implications, market reactions and portfolio positioning.

Per our friends over at Strategas Research Partners, the April 2nd tariff announcements will generate approximately $470 billion in revenue on top of the $150 billion already enacted. With a minimum 10% tariff instituted on all imports from U.S. trading partners and higher rates on countries with existing trade restrictions, the cumulative impact is effectively a doubling of the corporate tax rate (which is presently 21%, per the TCJA of 2017). It ended up being the most aggressive scenario relative to consensus expectations, equivalent to more than 2% of U.S. GDP.

And the market simply wasn’t priced to absorb this magnitude of a potential supply & demand shock to the system. From the February peak, the S&P 500 is down 4 forward P/E multiple points and the Nasdaq is down 6.5. All things considered, the Nasdaq is now trading below its 10Y average of 25.5x, down to 21.9x. We are in the early innings of a recalibration to a new world order that includes a material slowdown in growth expectations for 2025/2026. Is this enough to tip us into a shallow recession? It’s anybody’s guess at the moment, but recession calls are suddenly rampant.

The subsequent retaliation from China and speculation for more countries to do so has accelerated the downdraft in markets. It’s still early days of course, but the few countries who appear either willing to negotiate or outright eliminate tariffs on U.S. goods have done very little to stem the tide. Clearly, this is a rapidly evolving situation, and it is going to take time for the multitude of scenarios to play out over the coming weeks and months.

Believe it or not, the Fed funds futures market is now pricing in 5, 25bps rate cuts in 2025 (May, June, July, September, December) with more cuts projected into the first half of 2026. It is so typical the market would try to force the Fed’s hand to step in, craving the sugar high from policy accommodation, but it’s not at all clear that Fed policy alone can or should provide an offset given the magnitude of tariffs. In our view, we need more policy tools to help do that.

In the coming weeks we will be paying especially close attention to:

Any potential breakthrough on tax policy negotiations, including new, proposed spending cuts, with an emphasis on individuals to support consumer spending at a time when sentiment is rapidly deteriorating. The corporate tax rate may be important to markets, but the health and stamina of the U.S. consumer is critical to avoiding an economic or earnings recession.

Any potential change in Fed policy response. At a speech on April 4th, Chair Powell indicated despite the market selloff, economic data remains solid, inflation is within an acceptable range, and the FOMC remains firmly on PAUSE. Investors were hoping for a dove and instead got a hawk.

Any potential court rulings or Congressional legislation that could change the course of tariff policies.

Given there is no historical playbook for widespread tariff policies, what’s an investor to do?! I’d encourage you to check out our latest “Musings on the Market” edition called, Tariffs Part Deux.  It’s times like these that call for a mix of brilliant and boring investment strategies to help portfolios weather the continued purple haze of policy uncertainty.

Thanks for tuning in.  In a policy-driven environment, it’s enticing for investors to try and swoop in making a big allocation change based on the headlines of the moment – only to get whipsawed or caught flat-footed. Stay the course! And, we will continue to keep you updated as the circumstances and our thoughts evolve.