“‘Tariff’ is the most beautiful word in the dictionary.”
— Donald J. Trump
Summary
White House policy gyrations on tariffs and Fed independence sent markets on a wild ride in April. ‘Liberation Day’ tariffs were far higher than generally anticipated, sparking the sharpest sell-offs across equities and credit since the onset of the COVID-19 pandemic.
Growing concerns about US political risk unusually caused long-end US Treasuries to sell off together with the dollar. The rise in US borrowing costs and the apparent threat to US assets’ haven status caused Trump to pull back, freezing the worst of the tariffs for 90 days.
Equities and credit recovered strongly following the policy reversal (the S&P 500 down a mere -0.7% on the month) but Treasuries and the dollar only partly pared losses, reflecting ongoing uncertainty about US economic policy, with trade negotiations ongoing with numerous trading partners and China apparently digging in for a trade war.
With the full economic impact of the new tariffs still to be felt and uncertainty remaining high, volatility is likely to continue in the near future, demanding a disciplined and diversified approach to investment portfolios.
Markets were left dizzy in April. And, unsettlingly, there was one, unpredictable man spinning them around: Donald Trump. Rapid, violent policy gyrations emanating from the Oval Office dominated markets throughout the month. That the S&P 500 ended April a mere -0.7% down does not begin to tell the whole story of the wild ride investors endured.
The Donald Is For Turning
Markets were left dizzy in April. And, unsettlingly, there was one, unpredictable man spinning them around: Donald Trump. Rapid, violent policy gyrations emanating from the Oval Office dominated markets throughout the month. That the S&P 500 ended April a mere -0.7% down does not begin to tell the whole story of the wild ride investors endured.
By way of a recap, then, for anyone who blinked and missed a whole trade policy cycle:
Wednesday 2nd April was America’s ‘Liberation Day’. Trailed and delivered with much razzmatazz—but little market-steering forewarning of what was to come—Trump announced a 10% baseline tariff on essentially all trading partners, topped up with dramatically higher ‘Reciprocal Tariffs’ on countries with trade surpluses with the US (as high as 50% imposed on Lesotho). Markets spewed. Previously announced 25% automobile tariffs then came into effect. On the Friday, China retaliated with 34% tariffs of its own on US goods (matching the new 34% Liberation Day tariffs, which took total tariffs on China to 54%). So Trump hit back with another 50% (total: 104%). Beijing countered: 84% on US goods. Trump saw them and raised: 125%, announced via a post on his Truth Social platform. White House officials checked: he actually meant 145%, including earlier 20% tariffs. On Monday 7th, markets kept sinking—but the White House announced it would negotiate tariffs with Japan, opening the door to others.
This did not suffice to soothe investors’ nerves. By Wednesday 9th, Trump felt markets were getting ‘a bit yippy’ (an uncharacteristic understatement from Mr Superlative). He would pause the ‘Reciprocal Tariffs’ for 90 days, to allow for negotiations; in the meantime, the 10% rate would apply for all. Except, of course, for China; the wrath of Trump’s trade war had narrowed onto Beijing after it showed ‘lack of respect’. Except, a few days later, Trump then quietly exempted smartphones and other electronic goods—i.e., the bulk of Chinese exports to the US by value—from the China tariffs. And he has kept nibbling at the new tariff regime since, including a softening of the auto tariffs at the end of the month.
“YOU’RE FIRED!” … Or Not
As if all that was not enough, when markets began to settle mid-month, Trump gave them another stir, making some of his strongest statements yet that he would oust Jerome Powell as chair of the Federal Reserve. This move, of doubtful (though essentially untested) legality would severely undermine the central bank’s independence. The threat to fire Powell for failing to cut interest rates (as Trump has repeatedly demanded) was backed up by officials, who said the Administration was exploring ways to rid Trump of the troublesome banker.
Here too, though, Trump demonstrated the Art of the Retreat in the face of market consternation. Backpedalling from calling Powell ‘a major loser’ whose ‘termination cannot come fast enough’, Trump declared he had ‘no intention of firing’ him.
Markets Got ‘A Bit Yippy’
How did markets respond to all of this?
Equity investors took fright at the unexpected scale of the tariff blitz (and at the threat to Fed independence). US stocks were the epicentre but markets elsewhere were not immune. The blowback was immediate and fierce: in the two days following Liberation Day, the S&P 500 fell -10.5%, the fifth-worst two-session performance since the Second World War. Declines extended into the following week, such that by the close on Tuesday 8th, the S&P 500 had lost -11.2% on the month, to stand -15.0% down YTD—and in bear market territory (down -20% from its February high). Volatility spiked: the VIX Index surged to 52, easily its highest since March 2020 and the onset of the coronavirus pandemic. Elsewhere, Japan’s Nikkei slipped -7.6% and Germany’s DAX -9.4% from the eve of Liberation Day to the reprieve a week later.
Bond markets, too, were shaken—including, most troublingly, the US Treasury market. Corporate credit sold off; US high-yield spreads saw their biggest daily widening since March 2020, reaching 461bps, a whopping +173bps wider than at the start of the year. Of more fundamental concern were moves in US Treasuries. Yields across the curve initially fell, as Treasuries fulfilled their typical safety function. However, as the market mood soured, longer-end Treasuries actually joined the sell off. The 30-Year yield saw its biggest daily spike since March 2020: investors were beginning to ask real questions about the long-term impact of the policy developments—and about the viability of US assets’ safe-haven status. In its biggest weekly climb since 2001, the 10-year yield went from 4.0% to 4.5% in the week to 11th April. Weak demand for a 3-Year Treasury auction during that week suggested international buyers were turning away from US government debt. Most strikingly, the dollar sold off sharply at the same time as Treasuries; at its weakest in April, the DXY index was down -5.5% on the month (and -9.2% on the year). This is unusual—for US assets; it is more typical of emerging markets suffering capital flight. (Ordinarily, higher US Treasury yields will attract overseas investors to this low-risk asset, supporting the dollar, or conversely, a weaker dollar is a buying opportunity for US assets, pulling down yields.)
“Investors were beginning to ask real questions about the long-term impact of the policy developments—and about the viability of US assets’ safe-haven status.”
It was in this troubling context—with US long-term borrowing costs surging and the dollar’s status being questioned—that Trump called the 90-day pause. That pause brought some dramatic reversals. On the day of the announcement, the S&P 500 gained +9.5%, its biggest one-day jump since October 2008 – and ultimately, stocks recovered further across the month to end not far off flat. High yield credit spreads, too, pulled back sharply tighter. But while both the dollar and long-end Treasuries pared back some of their losses, they remained well down on the month (dollar DXY Index: -4.1%; US30Y Yield +14.7bps). The tariff reprieve has not stopped investors asking serious questions about the path forward for US assets.
The Political Risk Premium of Trump 2.0
Stepping back, a key takeaway for investors from April’s developments is what they say about the nature of policymaking under Trump 2.0—and about an expanded political risk premium attaching to US assets.
Beyond the sheer scale of the Liberation Day tariffs, investors were troubled by how the rates were set. Having been told that this was the work of several months’ careful analysis of the macroeconomic impact of trade partners’ sundry trade (mal-)practices, investors were bemused to find instead the blanket application of a simplistic formula based on the scale of partners’ surpluses with the US. This produced all kinds of anomalous outcomes. Botswana was hit with 37% tariffs: being De Beers’ primary source, the country exports lots of high-value diamonds to the US (99.5% of its US exports in 2023) but imports comparatively little in return, producing a large percentage imbalance (though of negligible dollar importance relative to the total US deficit). There are no active commercial diamond mines in the US; changing that is not known to be a MAGA priority. Heard Island, meanwhile, got away with the 10% baseline tariff—but it is uninhabited, save for penguins.
Trump’s freezing of the ‘Reciprocal Tariffs’ reportedly came about because Treasury Secretary Bessent seized the opportunity of Peter Navarro, the tariffs’ primary architect, being stuck in a meeting elsewhere —allowing Bessent to oversee Trump’s drafting of the post announcing the pause, uninterrupted by a trade hawk.
This suggests a haphazard approach to crafting highly consequential policies—policies with enormous market-moving power—eroding the Trump Administration’s economic policy credibility.
More fundamentally, April underscored the risks inherent to political power vested in one, unpredictable man—with few political heavyweights around him and increasingly weak checks on his action. Political commentators wonder at Trump’s ability to shift the Overton window—that portion of the policy spectrum tacitly permissible at any one time. But this creates a challenge for investors trying to price outcomes. Trump is an avowedly unorthodox politician, willing to do and say things once apparently unthinkable—this is why he was elected. Meanwhile, with key officials talking at cross purposes or oblivious to major policy shifts, it is not clear who actually speaks for the Administration—beyond the president himself. The net effect is a dramatic widening of the range of possible outcomes, combined with a narrowing of the information sources as to which outcome is most likely. Variables that previously appeared firmer must now be plugged into financial and macroeconomic models with a far wider probability distribution —making outcomes all the more uncertain. It is this that is levying a heavier political risk premium on US assets, especially long-end rates and the dollar.
“April underscored the risks inherent to political power vested in one, unpredictable man—with few political heavyweights around him and increasingly weak checks on his action.”
Where are we now?
Equities may have taken a roundtrip in April, with the S&P 500 recovering essentially all its Liberation Day losses, but there is still considerable uncertainty to address—especially on the settled state of the new trade regime and what its impact will be on economies and company earnings. Despite the 90-day pause, the US average effective tariff rate is estimated as up to 28% (albeit before substitution effects), dramatically higher than just a month ago—indeed, the highest since 1901. This is a potentially era-defining shock to global trade, on a par with the Smoot-Hawley tariffs in 1930 and the Nixon Shock in 1971. And the fuller ‘Reciprocal Tariffs’ may yet come in July. Negotiations are underway (including with Japan, Korea and the EU) but fundamentally it will be difficult to simultaneously hammer out substantive agreements with dozens of countries in just three months (especially with US complaints focused on more sensitive and complex non-tariff barriers, such as safety standards and VAT). Trump appears keen on deals, though, and the 90-day deadline could be flexed for ongoing talks.
A major moving part is China—or maybe it is not moving so much: Beijing denies Trump’s repeated claims that Xi has called and negotiations are underway. With mutual tariffs having ratcheted up to embargo-like levels, China appears to be preparing to dig in for a sustained trade war—pointing to a divorce of the economic superpowers, with major global ramifications. China has some grounds for confidence in the fight but it will not be painless and negotiations may begin in time.
“China appears to be preparing to dig in for a sustained trade war—pointing to a divorce of the economic superpowers, with major global ramifications.”
The economic impact of the tariffs is only just beginning to play out. US GDP contracted -0.3% in Q1 in direct response to the tariffs, as imports were frontloaded ahead of tariffs. This tells us little. Other hard data continue to point to US economic resilience. But leading indicators suggest the possible pain ahead: business and consumer confidence have plunged (the latter its weakest since May 2020). US recession risks have increased and at least a slowdown appears likely (with growth forecasts elsewhere also trimmed). With tariffs expected to boost consumer prices, stagflation is a genuine risk. This will show up in corporate earnings—and with US stocks still richly valued (S&P 500 forward P/E: 21x), the risk of further declines is real.
For us, this has been—and remains—a time not for panicked selling of long-term investment assets, a stance vindicated by the sharp recoveries in the back half of April. Instead, we have seen the benefit of maintaining disciplined, diversified portfolios. An earlier reduction in duration exposure, as well as below-benchmark equity allocations to make space for diversifiers have all helped: gold rallied strongly this month in a clear flight to safety, while skilful discretionary macro hedge fund traders have been able to reap rewards from all the volatility. While it has settled for now, we expect volatility to remain a feature at least in the coming months, while investors continue to weigh the fallout of the shifting tariff regime across asset classes.
“For us, this has been—and remains—a time not for panicked selling of long-term investment assets, a stance vindicated by the sharp recoveries in the back half of April.”
If you have any questions about the themes discussed in this article, please do not hesitate to get in contact with us: info@bedrockgroup.ch
Steep, erratically implemented US tariffs have shaken financial markets, business and consumer confidence, and the global economy. Growth is expected to slow—with the potential for a sharper deterioration if threatened ‘reciprocal tariffs’ are implemented later in the year. To be sure, the US can fall back on strong fundamentals including its technology leadership and greater dynamism and competitiveness than many peer economies—all of which Trump is keen to promote through supply side and tax reform. And the President has already retreated from some of his maximalist policy positions as the dollar sinks and US Treasury market swings wildly. But the volatility is likely to persist—and a ‘hard landing’ may yet close out this cycle. In this environment, we like precious metals and cash and government bonds, as well as hedge fund diversifiers
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