After sparking the steepest plunge in financial markets since the global pandemic five years ago, President Donald Trump’s administration made another dramatic pivot in its trade war strategy on April 9: It paused for 90 days the “reciprocal” tariffs that had been in effect for less than 24 hours. Though markets quickly rallied on the news, uncertainty remains and, as such, volatility is expected to continue.
Is this news bullish or bearish?
With the S&P 500 index bouncing 9.5% on April 9 – its best daily return since October 2008 – the market signaled a sense of relief, even though the tariff against China was escalated to a punitive 125% and a 10% tariff remains in place on all other trading partners for 90 days, to allow for negotiations. With these changes, we estimate that the US weighted average tariff rate will remain at approximately 22.5% – still the highest in more than 100 years.
This is a textbook illustration of how expectations can change over a short period of time. Prior to the past two months, the idea that 10% tariffs could be cause for relief would have seemed unbelievable. But after two months of tariff escalation, the Trump administration’s decision to take an off-ramp, again, regarding every country except China, is certainly a better scenario for businesses as well as investors, as compared to the alternative of fighting a trade war with essentially the entire world. Better, though far from great; the quicker the trade war between the world’s two superpowers ends, the less economic dislocation there will be for everyone.
What to keep an eye on
It will be crucial to watch what happens with the various bilateral trade negotiations taking place along parallel tracks. We see potential for a sizable number of negotiated trade deals during the 90-day pause, enabling tariff reductions on both sides; however, it is a question of how much economic damage occurs first. Until there is tangible evidence that at least some talks are making progress, uncertainty will remain high.
As it relates to China, ultimately there will also need to be a negotiated solution, though the political dynamics are particularly difficult in this case. It may come down to whether the two leaders – Trump and Xi Jinping – are willing to reach a deal.
One indicator of progress in negotiations is the extent to which foreign governments may be rescinding their retaliatory tariffs on US products. China has been the most forceful in retaliating – a textbook case study of tit-for-tat escalation – followed to a lesser extent by the European Union and Canada. If we see any of these economies walking back their retaliation, that would be another encouraging sign.
For its part, the White House plans to unveil another sector-level tariff on pharmaceuticals, which have been exempt from all new tariffs thus far. A moderate approach to this decision would help negotiations with trading partners that have significant pharma industries, such as India and Ireland.
The bottom line for investors
Even for those tracking the day-to-day twists and turns of the trade war and negotiations, our important message to investors is unchanged: stay the course and try to avoid the temptation of making knee-jerk investing decisions.
While the reprieve helped the S&P 500 stage a massive relief rally, we expect volatility to persist. We have often highlighted that the worst days in the market can be clustered near the best days, so investors should persevere. Given the sharp sell-off the market has experienced in recent weeks with near-record bearish investor sentiment, a sharp technical reversal was likely. However, with the effective tariff rate likely to remain historically high due to China’s new, elevated tariff rate, we are not making any adjustments to our updated views – 2025 US Gross Domestic Product growth of roughly 1.0% and a 2025 S&P 500 target of 5,800 – as not much has changed.
Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions. Indices are not available for direct investment. Index performance does not include transaction costs or other fees, which will affect actual investment performance. Past performance is not indicative of future results. S&P 500: This index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. It consists of 400 industrial, 40 utility, 20 transportation, and 40 financial companies listed on US market exchanges. This is a capitalization-weighted calculated on a total return basis with dividends reinvested. The S&P represents about 75% of the NYSE market capitalization.
A message from Advisor Perspectives and VettaFi: To learn more about this and other topics, check out some of our webcasts.
© Raymond James
Read more commentaries by Raymond James
