Market Update

John M. Fidler | Chief Investment Officer

(502) 259-2543 | John.Fidler@syb.com

Markets have been volatile over the last few weeks, largely due to policy uncertainty around tariffs from the incoming administration. The scale and scope of the tariffs announced yesterday was greater than markets anticipated, arguably representing the most radical shift in trade policy in American history. The announcement pushed tariffs to levels above the infamous Smoot-Hawley tariffs that exacerbated the Great Depression. Specifically, initial estimates of the reciprocal trade order suggest that the overall US tariff rate could rise into the 25-30% range if the new tariff rates are sustained for a significant period, which are the highest level since the 1930s. 

The measures include:

• Universal 10% tariffs on all goods imported from all countries
• "Reciprocal tariffs" on countries with whom the US has a large trade deficit
• Authority to increase tariffs further on countries who retaliate

 Certain key sectors like semiconductors and pharmaceuticals are exempted, and there are special provisions for Canada and Mexico to maintain compliance with the USMCA, passed in Trump's first term. 

 The all-in impact of these measures is difficult to overstate. Tariffs on Chinese goods are now over 50%. Furthermore, the "Reciprocal" tariff rates are not based on the actual tariffs levied by other countries, but rather just on America's trade imbalance with that country. 

 A one-time effective tax increase of 20-60% on all goods Americans buy is not bullish for markets. The larger issue is structural. The Trump administration wants to radically reform the global trade structure that has existed since NAFTA in 1994 and China's entrance to the WTO in 2000. The crux of the issue is that since enacting these historic policies, America has traded well-paying blue-collar jobs for cheap flat screen TVs and other consumer goods. The current administration believes this is a bad deal for Americans. Certainly, it has been a bad deal for some Americans, however comparative advantage (the idea that certain countries are better and worse at making certain things) is a fundamental law of economics that leads to higher global wealth. Globalization was a tailwind to markets for 25 years. Deglobalization may benefit certain US-centric companies (and perhaps create select winners internationally), but in general should serve as a headwind for markets.

 Moreover, the methodology for calculating the "Reciprocal Tariffs" implies that these measures are not temporary or bargaining tactics meant to "level the playing field" in terms of trade restrictions, but rather tools intended to shrink the trade deficit permanently. 

 A drastic reset to global trade will result in a significant slowdown of global economic growth and a commensurate decrease in stock prices in the short-term. Already capital market activity (bond issuance, M&A, IPOs) is slowing due to the chaotic policy environment. If the tariffs announced yesterday persist for any meaningful length of time, a recession and bear market are likely, and a stagflation scenario is possible. Although there is still time for cooler heads to prevail, one thing is clear: a global trade war will result in no winning position. 

Our call for a 1Q correction in our 2025 outlook is coming to fruition as the market looks set to make new lows for the year today. Last month, we cited the 5700 level on the S&P 500 as key support, and an area where we would be buyers of select companies we believe are well-positioned to navigate a slowing economy (which we have done). We also added exposure to domestic European equities as European fiscal spending and reindustrialization emerged as a durable theme in markets in Q1. We have long emphasized asset class diversification, and foreign markets, fixed income, and diversifying alternatives are all tools that can smooth returns in extreme market environments. A weaker dollar benefits several of our favored portfolio holdings, such as emerging markets. 

 April will likely prove a critical month for markets. From a seasonal and technical perspective, the market should rally in April. If it does not, and trade war storm clouds do not clear quickly, a recessionary playbook may be in order. We are determined to be prepared and thoughtfully positioned regardless of how the macro environment evolves. Please do not hesitate to reach out to your Stock Yards team with any questions. 

We provide the information in this newsletter for general guidance only. It does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, investment, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, expressed or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.

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