Part 1: Tarrifs
From their year-to-date highs, U.S. equities have retraced nearly 10%, while Treasury yields have dropped 50 basis points across the curve—a sharp repricing of risk that few foresaw. Investors, until recently, dismissed tariffs as a mere negotiating ploy, a bit of bluster meant to extract better terms without real consequence. That assumption is now being unceremoniously dismantled. The market’s original read on Trump—a dealmaker who would talk tough but ultimately relent—increasingly appears misguided.
A More Ambitious Trade Doctrine Emerges
Since his inauguration, President Trump has demonstrated an unorthodox commitment to tariffs, deploying them not merely as a corrective tool for trade imbalances, but as a broader instrument of economic nationalism and foreign policy leverage.
While investors are now scrambling to recalibrate, the deeper risks of this tariff regime remain, curiously, underpriced. The ultimate impact hinges on a single question: Are Trump’s tariffs mostly theater, or will they become policy doctrine?
Trump’s tariff objectives have remained largely consistent with those of his first term:
To redress what he sees as unfair trade practices and recalibrate structural trade deficits.
To restore U.S. manufacturing strength by penalizing offshore production and incentivizing reshoring.
To mitigate national security risks, reducing reliance on foreign supply chains in strategically sensitive sectors.
To enhance negotiating leverage, using tariffs as a cudgel to extract favorable trade terms.
Yet, two new dimensions have emerged with greater urgency:
Tariffs as a geopolitical weapon. No longer confined to economic disputes, tariffs are now a blunt-force tool for foreign policy enforcement. Whether targeting China over fentanyl trafficking, Mexico over border security, or Denmark over Greenland, the administration is signaling that tariffs will be wielded for purposes well beyond trade.
Tariffs as a revenue-raising mechanism. With Trump’s policy agenda still tethered to tax cuts, tariffs present a convenient means of offsetting lost revenues—a de facto fiscal policy tool, dressed in protectionist rhetoric.
The Market’s Miscalculation
Thus far, markets have largely priced in talk, not action. The prevailing bet—that Trump’s tariff threats would remain theoretical—is being swiftly re-evaluated. Investors, who had once believed they could afford to ignore tariffs, now find themselves forced to reckon with their reality. Whether this is a momentary panic or the beginning of a sustained repricing remains to be seen—but if history is any guide, tariffs, once imposed, are seldom reversed quickly.
Not since the Smoot-Hawley Tariff Act of 1930—the legislative misadventure widely blamed for deepening the Great Depression—has the global trade landscape endured a shock of such magnitude. If the 2018 tariff skirmish was an irritant, this is a seismic event. That prior episode saw U.S. average import tariffs climb from 1.5% to roughly 3%, a movement that, in hindsight, now seems quaint. Under the newly imposed framework, that average surges to nearly 11%, a level not seen since the 1940s.
But beyond percentages and policy minutiae, this tariff escalation marks something far graver: the unmaking of a century-old trade consensus. For decades, the prevailing economic doctrine held that frictionless commerce, not protectionism, was the superior path—an article of faith upheld by successive administrations, regardless of party. That foundation is now under direct challenge.
Whether this shift proves a fleeting anomaly or a structural transformation remains an open question. But the market, ever forward-looking, is left to grapple with an unsettling possibility: that trade, once assumed to be a settled question, is once again a battleground.
February 1 – With the stroke of a pen, President Trump sets the stage for a trade confrontation of historic proportions. An executive order mandates 10% tariffs on all Chinese imports and 25% duties on goods from Mexico and Canada, effective February 4.
February 3 – A temporary reprieve, or merely the eye of the storm? Trump agrees to a 30-day pause on tariffs targeting Mexico and Canada, extracting, in return, vague commitments on border security and drug enforcement.
March 4 – The pause proves short-lived. The 25% tariffs on Mexico and Canada take effect, though Canada’s energy sector receives a relative mercy—a mere 10% tariff. Meanwhile, Trump doubles tariffs on all Chinese imports, raising the levy to 20%.
March 5 – Detroit breathes a sigh of relief. In response to urgent pleas from Ford, General Motors, and Stellantis, Trump grants U.S. automakers a one-month exemption from the new tariffs on Canadian and Mexican goods.
March 6 – The exemption widens, if only temporarily. Trump postpones 25% tariffs on a range of Mexican and Canadian imports until April 2, though the administration insists these are merely delayed, not abandoned.
March 10 – Beijing fires back. China retaliates with a 15% tariff on key American agricultural exports, targeting chicken, pork, soybeans, and beef—commodities that form the backbone of Trump’s rural voter base. Markets take note. Stocks slide as investors contemplate the prospect of a prolonged and punishing trade war.
March 12 – Trump escalates once more. His administration removes exemptions on steel and aluminum tariffs, imposing a flat 25% duty across the board. Aluminum tariffs, formerly set at 10%, are raised to match steel at 25%.
March 13 – The President, never one to shy from a transatlantic confrontation, threatens a 200% tariff on European wine, Champagne, and spirits, a punitive response to the EU’s planned 50% tax on American whiskey. The rhetoric grows sharper, with tariffs on course to collide by April 1.
March 24 – In an unexpected twist, Trump turns his sights on Venezuela. The White House announces a 25% tariff on all imports from any country purchasing Venezuelan oil or gas, a maneuver that indirectly tightens the economic noose around China, which accounted for 68% of Venezuela’s crude exports in 2023.
The coming weeks will determine whether these measures signal the birth of a new global trade order or merely the opening salvo in an extended economic skirmish. Either way, the days of laissez-faire globalization, it seems, are firmly in the rearview mirror.
If sentiment could be distilled into a single word, it would be uncertain.
The market—trained by years of political brinkmanship—has seen threats come and go, and the latest round of tariff saber-rattling has left investors wondering whether this is bluster or the prelude to something more disruptive.
A familiar pattern is emerging. The first year of the previous Trump administration followed a similar script: bold trade threats, minimal follow-through, and a consequential weakening of the U.S. dollar as risk ebbed away.
The dollar’s retreat this time—visible in the pullback of key crosses since early February—suggests that markets, once again, see tariffs as a hollow threat. But history offers a cautionary note. In 2018, after months of equivocation, tariffs did materialize, and the dollar surged in response.
Will history repeat itself? A 10% tariff on China remains firmly on the table, alongside new levies on critical imports and European automobiles. If these—or more sweeping measures such as reciprocal or universal tariffs—take hold in the coming months, expect the dollar to reclaim lost ground in short order.
Yet, of all the threats in Trump’s arsenal, none looms larger than the proposed 25% tariff on Canada and Mexico. These two economies are not mere trading partners; they are economic extensions of the United States itself. With 75–80% of their exports bound for the U.S., the consequences would extend beyond bilateral trade disputes to GDP shocks and supply chain upheavals.
More significantly, such a move would mark a radical departure from U.S. policy, gutting the very essence of the U.S.-Mexico-Canada Agreement (USMCA)—the country’s most consequential trade pact.
A throwback, then, to the first Trump administration. In 2019, Mexico found itself threatened with tariffs over immigration disputes, though Canada escaped that round of pressure. As then, so now—market consensus holds that these tariffs are unlikely to be fully implemented, and even if they are, they would not last long.
But for the moment, hesitation reigns. The threats are real, yet the market’s muscle memory urges caution—until, of course, the first tariff hits the ledger.
From a purely arithmetical perspective, the United States stands apart from its trading partners in one crucial respect: its relative indifference to trade. In 2023, the sum of imports and exports accounted for a mere 25% of U.S. GDP—a figure dwarfed by the 73% trade dependency of Mexico and the 67% of Canada.
This asymmetry provides Washington with a strategic advantage in trade disputes; tariffs may inflict collateral damage on the U.S. economy, but they could prove existential to others.
Yet, insulation is not immunity. The specter of higher prices and uncertainty—the twin specters of any trade war—can restrain both household and business spending. The signs are already visible: softer consumer-spending data, faltering confidence measures, and a general malaise in discretionary demand.
The question, then, is whether tariffs remain the dominant policy tool or merely a prelude to a broader economic package. If tax cuts and deregulation come into focus later this year, they could serve as a countervailing force—mitigating weakness, stimulating investment, and reinforcing domestic momentum.
The real pain, however, may be borne elsewhere. Mexico and Canada, so intimately tethered to trade, find themselves far more exposed to the vagaries of Washington’s tariff ambitions. Their economies, already trailing U.S. growth over the past several years, start from a position of relative weakness. The imposition of broad tariffs would not merely trim their GDP forecasts—it could upend supply chains, disrupt employment, and weaken investor confidence.
In the end, the United States may well hold the better hand in this high-stakes game of trade brinkmanship—but even the strongest hands must be played carefully.
To the casual observer, the latest tariff threats—from Canada and Mexico to the broad auto industry—may appear as the opening gambit in a familiar game of brinkmanship. As in prior episodes, these levies seem designed to extract concessions that remain, as yet, undefined. Should America’s trading partners comply, the more theatrical threats may quietly fade.
Steel and aluminum, however, are a different story. These industries hold a special place in President Trump’s economic cosmology, their preservation framed not merely as an economic imperative but as a matter of national security. Protectionist impulses in this realm are not contingent on negotiation; they are, in all likelihood, a foregone conclusion.
Yet, of all the potential tariff actions, the most consequential would be a broad-based, reciprocal tariff regime—a measure that could lift the effective U.S. tariff rate by 1 to 2 percentage points under a conventional approach. If expanded to account for value-added taxes (VATs), as the administration has suggested, the increase could exceed 10 percentage points, a shift without precedent in modern U.S. trade policy.
The incorporation of non-tariff barriers (NTBs) would send this number higher still.
The current tariff landscape, however, is likely only in its infancy. 2-3 Months into a four-year term, one can expect that these measures will arrive in stages, each dictated by a distinct rationale. The first wave—the Mexican and Canadian tariffs—likely serves as a blunt instrument to extract leverage in both immigration negotiations and the upcoming USMCA review.
The second wave, including steel, aluminum, and sectoral tariffs, reflects a broader commitment to economic nationalism and security imperatives. China-focused levies straddle the line between these two camps—simultaneously a negotiating tool and a structural check on a strategic rival.
The third and most ambitious category of tariffs—the so-called universal baseline tariff—has not yet materialized, but the seeds have been planted. President Trump once championed a 10-20% tariff across the board, though the reciprocal tariff proposal now appears to have superseded it. Should this measure come to pass, it would rewrite the rules of global trade, applying pressure not merely to select industries or partners but to the entire system itself.
And so, the question remains: is this mere bargaining, or the opening act of a structural transformation? Markets and policymakers alike would be wise to consider the latter.
Sharks Opinion:
We Think the Trump administration regards globalization not as a rising tide but as an undertow—one that has hollowed out American industry, swelled trade deficits, and diminished the nation’s economic sovereignty.
In response, tariffs have become the preferred instrument for what amounts to an attempted remaking of the U.S. economy, a course correction aimed at restoring the country’s industrial base and reshaping its trade relations.
Markets, ever inclined to underestimate political conviction, initially dismissed these tariffs as mere negotiating postures.
That complacency is now giving way to a more somber reassessment.
The White House appears unmoved by market turbulence, seeing near-term economic and financial pain as an acceptable cost in pursuit of its longer-term agenda. China, meanwhile, sits in the center of the administration’s crosshairs, an overlapping target in both trade imbalances and national security concerns.
Investment Implications:
As tariff tensions mount, a risk-off bias seems inevitable. But dislocations bring opportunities.
We see promise in select Small- and Mid-Cap names—particularly those positioned for M&A activity, technological innovation, or service-based solutions that stand to gain where sprawling conglomerates struggle under the weight of tariffs. The protectionist wave could foster domestic market share gains for agile players, a dynamic worth watching.
In commodities, gold and copper appear well-supported, the former as an inflation hedge and the latter benefiting from both supply chain realignments and ongoing electrification trends. U.S. equities face near-term volatility, while Europe and Asia stand more exposed to economic spillovers should tariffs escalate into a full-fledged trade war.
For investors, portfolio resilience is paramount, The global trade order may be restructuring in real-time, and markets, as ever, must learn to price the new reality.
Part 2: Volatility
Volatility and the Tariff Uncertainty Premium
The Cboe Volatility Index (VIX), the market’s preferred barometer of trepidation, has retreated from its recent peak but remains well above historical norm.
But expectations can be deceptive. Should volatility prove more stubborn than the futures curve suggests, equities could find themselves adrift in rougher seas for longer than optimists expect. The market, in its collective judgment, appears to be wagering that the present bout of turbulence is a passing squall rather than the onset of a storm season.
Yet, the fundamental cause of this unease—tariff-induced unpredictability—remains unresolved. Corporate planning has become a guessing game, as firms struggle to anticipate shifts in earnings, input costs, and global demand. Expansion plans are deferred, hiring slows, and capital expenditure decisions are made under a fog of policy uncertainty.
Investors, ever attuned to risk, have responded predictably: eschewing cyclical names in favor of defensive bastions such as utilities and healthcare, while flocking to safe-haven refuges like gold. The S&P 500 has felt the strain, retreating under the weight of uncertainty, while across the Atlantic, the Stoxx 600—an index spanning 600 European firms—has climbed 12%.
If tariff risk remains unresolved, the equity risk premium may continue to rise, leaving investors with a stark choice: brace for further volatility or seek shelter elsewhere.
After two years in the wilderness, low-volatility stocks have emerged as 2025’s standout investment theme, outpacing their large-cap brethren in a market still reeling from policy-induced tremors.
The root of this newfound market preference? Uncertainty.
President Trump’s penchant for tariffs—both real and rhetorical—remains a constant disruptor. Like an unpredictable squall, trade restrictions materialize with little warning, leaving governments and corporations alike to brace for impact rather than plan with precision. That tariffs will raise domestic prices seems almost axiomatic, but beyond that, the landscape is murky. Will these policies reshore production as intended, or merely reroute supply chains elsewhere? The only certainty is that uncertainty itself has become the defining market force.
The rational response to such a climate is information asymmetry—a strategic advantage for those who can best anticipate how supply chains, financial flows, and corporate margins will recalibrate. Tariff effects are no longer a simple calculation of tax burdens but a multifaceted disruption to capital flows, inflation trajectories, and currency markets. The U.S. dollar, as both a reserve currency and a debt denominator for emerging markets, is at the epicenter of these shifts.
Yet, markets have adapted. Initially, investors dismissed Trump’s trade rhetoric as mere posturing, a tactic to extract concessions. But after multiple reversals—tariff threats, sudden hikes, exemptions, retractions—that assumption has been discarded. Markets no longer trust de-escalation.
Concessions are viewed as temporary gestures rather than lasting resolutions. This skepticism is evident in the lukewarm response to the March 2025 tariff postponements. Earlier, investors were momentarily reassured by exemptions for Canada and Mexico, but subsequent policy pivots have eroded confidence in any semblance of stability. Meanwhile, Europe is preparing its own retaliatory measures, raising the specter of a broader trade war.
With global trade flows under siege and corporate earnings under pressure, investors have begun to favor the predictable over the precarious. Defensive names—low-volatility stocks, gold, real assets, and resilient service companies poised to capitalize on tariff-induced dislocations—now find themselves in favor. The broader market, meanwhile, watches with unease as Washington’s trade playbook continues to defy expectation.
As the market fully anticipated, the Federal Reserve held interest rates steady at last week’s meeting. The federal-funds rate remains in the 4.25%-4.50% range, unchanged since December, following a one-percentage-point cut between September and year-end 2024.
This came after a 15-month period—from July 2023 to September 2024—where rates stood at 5.25%-5.50%, the most aggressive monetary tightening in over four decades, an effort to unwind the excesses of the pandemic-era zero-interest-rate policy.
But while the Fed’s hand was steady, its vision remains clouded. The expected trajectory of further rate cuts—once a relatively orderly roadmap—has been thrown into disarray by stubborn inflation and the prospect of a tariff-driven economic shock. Layer onto this the potential for significant shifts in fiscal policy and regulatory frameworks, and the economic landscape becomes increasingly difficult to navigate.
For now, the FOMC has kept to its December script: two cuts in 2025, followed by two more in 2026. Yet, when asked to elaborate on the reasoning behind these projections, Fed Chair Jerome Powell barely concealed his frustration. With tariff policy veering into uncharted territory, he threw the question back to his audience: “What would you write down?” In an environment where fiscal and trade policies shift with the winds of political expediency, the Fed appears to have simply held its place on the map, even as the landscape around it morphs unpredictably.
Meanwhile, the economic data remains as conflicted as the policy outlook. Housing and industrial production numbers suggest resilience, while consumer sentiment and retail sales tell a different story—one of creeping caution. As uncertainty mounts, markets are left to determine whether the Fed is steering the ship—or merely trying to stay afloat.
Inflation continues to outpace the Federal Reserve’s 2% target, leaving the central bank’s efforts to rein in price growth increasingly vulnerable to external shocks, particularly the looming threat of tariff hikes.
President Donald Trump’s recent announcement of April 2 as the next deadline for further tariffs has added a layer of complexity to the Fed’s calculus. While previous deadlines have been delayed—often at the eleventh hour—the market remains on edge, albeit with less panicked reaction than in past months.
Despite this uncertainty, Fed Chairman Jerome Powell presented a defensible rationale for the committee’s base case.
The persistence of tariffs and sticky inflation at the start of the year has caused the expected core PCE inflation for the fourth quarter of 2025 to rise to 2.8% year-over-year, up from the previous forecast of 2.5%.
Conversely, real GDP growth expectations have dipped from 2.1% to 1.7%, with the Fed projecting that tariff-induced inflation will not be sustained in the long run. In this context, the federal-funds rate trajectory remains unchanged—for now.
But as Powell himself noted, the inflationary impact of tariffs may be more profound and enduring than current Fed models suggest. He candidly admitted that it remains too early to assess whether the inflationary effects of tariffs are merely a transient shock or whether they will cause a persistent shift in expectations, further distancing inflation from the Fed’s target.
The trajectory of those expectations, he suggests, will depend on how much unanchored inflationary psychology takes hold as these tariff policies unfold.
