Navigating Trump's Tariff Tsunami

Just when you thought things couldn’t get more bizarre south of the border, President Trump made his big tariff announcement on April 2. The media has been absolutely saturated with tariff information since, so we’ll spare being redundant here. However, there are a few key takeaways to point out:

• A 10% “baseline” tariff on all imports went into effect on April 5, while additional tariffs will go into effect on ~60 countries on April 9.
• The tariffs were far more severe than expected with the U.S. now applying an effective tariff rate of ~20% on imports (country specific rates vary).
• This is the highest U.S. effective tariff rate since the 1930s and near 10x higher than they were before Trump took office.
• Canada and Mexico were largely spared additional tariffs due to existing trade agreements.

Recession odds have risen, but still not a sure thing

Many pundits believe that these tariffs are simply a negotiating tool or that the Trump administration will walk them back should the economy show signs of weakening, the stock market continues to fall, inflation rises, etc. Of course this might be the case, but there appears to be something different in Trump’s second time around as the U.S. President. He seems more confident and resolved to follow his instincts rather than advice.  

The President has stated that countries are “dying to make a deal”, but “sometimes you have to take your medicine”. With Trump, this unpredictability is the point and he likes keeping people on their toes. He’s also a lifelong fan of tariffs and knows that companies will only build and redomicile activities to the U.S. if they feel the tariffs are permanent. In this way, there is a tug-of-war between whether the President can stomach the potential pain of a tariff war with what he sees as long-term gains for America.

Many economists are now raising their recession odds for the U.S. from “not very likely” to even odds. For instance, Goldman Sachs now sees a 45% chance of a U.S. recession this year, while J.P. Morgan pegs the odds at 60%. Given our tight connection to the U.S. economy, this also increases the odds of a recession in Canada. On the flip side, markets now expect the Federal Reserve Board to cut rates by a full percent this year to support the economy from just one 0.25% cut at the start of the year.

Darkest Before the Dawn

The U.S. market has taken the biggest hit year-to-date on a total return basis with the S&P 500 Index down over 13% (USD) to the end of April 4. Much of this downturn came after the tariff announcement last week, with the S&P 500 Index down by 10.5% (USD) over the two-day period ending April 4 - the fifth largest two-day decline since 1950 as Figure 1 below shows. 

Figure 1: S&P 500 Index – Biggest 2-Day % Declines and Forward Total Returns (1950 – 2025) 

% in USD. Source: Creative Planning 

Two things that are interesting about Figure 1:

1. Eight of the ten biggest two-day drawdowns in the last 75 years have occurred since 2008. Most investors today have lived through this type of volatility before and have seen what’s on the other side. It’s also definitely a comment on the interesting times we’ve lived in with the Great Financial Crisis, the Pandemic, and now the ‘Tariff Tantrum’.     
2. How rapidly the markets have recovered from these sell downs. In 1987, 2008, and 2020, the markets were higher a year later, and significantly higher over the next three and five years. This is an indication of how the market is a forward-looking mechanism. It is looking ahead at what’s coming, not what’s happening now - and what is already being priced in today is a fairly significant slowdown.

Of course, most investors are diversified. The U.S. market is not the whole story. Canadian stocks, particularly dividend payors, and International equities have performed much better than U.S. stocks, while bonds have positive returns year-to-date. The tariff shock coming out of the U.S. is a significant economic event. A recession in Canada, the U.S. or globally is not a sure thing, but it’s likely that, at least in the short term, we will continue to see increased volatility. With that volatility can come negative headlines but it can also come with opportunity for those that can stick to their plan.

As proponents of long-term investing, we prefer not to comment on every market move. Instead, we try to stick to a schedule of communication that keeps our clients informed, while not inundating them with too much information. This is the second “off schedule” communication that we’ve put out so far this year, which is a sign of how fluid and fast moving these times are. Anything written today may be outdated tomorrow. In such an environment, it’s crucial to continue to see the big picture, keep the long term in focus and, most importantly, control our emotions. We know this sounds simple, but we realize it isn’t easy. Large swings in markets can make even seasoned investors wary, especially in today’s world of constant news flow. Feeling nervous during these times is absolutely normal. This is why you have us – we’re here to keep eyes on this situation for you, and help you navigate and stay on course when times feel uncomfortable and overwhelming.

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