In a move that has deeply shaken markets, the Trump administration this week announced a 10% universal tariff (effective April 5), more than tripling the current effective rate of 3%, and plans to levy country-by-country “reciprocal” tariffs (effective April 9).
What do the latest tariff actions mean for markets and your portfolio? Here’s our initial take.
Trump Tariffs Set Historic Highs
Taken at face value, the tariffs that President Trump announced on April 2 would increase the effective rate on imports from about 3% previously, to 17%–22%, depending on whether tariffs are cumulative on previously announced actions on steel, autos and other items. This is among the highest rate in history and exceeds the Smoot-Hawley tariffs of the 1930s.
If Morgan Stanley’s Global Investment Committee was certain that the recently announced tariffs were the non-negotiable “end game” for the administration, we would be selling equities down to the lowest levels allowed in an investor’s strategic asset allocation and calling for a bear market with limited help from the Federal Reserve, which would be battling inflation that likely rises back to about 5%.
However, there is time – until April 9 – for countries to negotiate before the tariffs are implemented, and it appears that President Trump is set on bilateral negotiations where objectives are unclear.
Are tariffs intended to truly generate U.S. revenues to fund tax cuts? Incentivize “onshoring” of manufacturing facilities, which will take months if not years to take effect? Open global markets for U.S. exporters to cure the trade deficit?
It is not certain that the Trump administration is clear on such questions. It has taken a maximalist approach to reciprocal tariffs, stacking them on top of already announced levies in a significant negative surprise to markets, which risks lowering gross domestic product (GDP) growth and raising the odds of both higher inflation and recession. Importantly, the administration is determining the reciprocal tariff rate partly based on the size of the U.S. goods trade deficit with the specific country. This makes off ramps and de-escalation potentially more difficult, since it may imply that countries will have to address their own trade surplus with the U.S. during tariff negotiations.
Recession Odds Rising?
Morgan Stanley Research recently cut its 2025 GDP growth estimates to 1.5%, from 2.2% previously. With the administration’s latest action, the weight of these tariffs – if truly implemented – could push the economy into contraction territory while adding as much as 1.0–2.5 percentage points to inflation. From our perch, the odds of a U.S. recession are now up to 40% from 25%, and “stagflation” (in which growth slows as inflation persists) is up to 30%, while the base case “soft landing” is down to 30%.
Critically, on the night of April 2, the Morgan Stanley Research economics team removed their call for a June rate cut by the Fed, believing inflationary pressures may prevent Fed Chair Jerome Powell from proceeding. The Global Investment Committee believes that short of a recession and the U.S. labor market collapsing, the so-called “Fed put” (i.e., an expectation that the U.S. central bank will intervene with policy measures to prop up financial markets during significant downturns) is on the sidelines.
A Time to ‘Wait and See’
However, because odds are at least 50/50 that things will change over the course of the next 90 days, the Global Investment Committee is apt to take more of a “wait and see” approach.
The fact that the S&P 500 held at the 5500 level in the futures market overnight from April 2–3 is significant and a hopeful sign that investors are still assuming that the market’s volatile movements on April 3 reflect a worst-case scenario and that it will quickly be walked back, with Israel, India, the EU and Brazil, as examples, already suggesting bilateral talks. Talks with China are also upcoming.
International trade is important for both the U.S. economy and stock market: 46% of total S&P 500 company profits come from overseas. Overseas profit exposure is as high as 57% for the tech sector and the “Magnificent 7” mega-cap tech stocks – but overall, it is much lower for other sectors like financials, intermediate industrials, health care and media/entertainment.
Stay Focused on the Bigger Picture
Headlines will continue to evolve quickly. Investors should be patient and vigilant, and avoid reacting emotionally, particularly in a way that might steer them off course with their strategic asset allocation and financial goals. Working with your Financial Advisor can help you steer through volatility and stay focused on your longer-term plan.
