Tariff-ying Markets

The long awaited ‘Liberation Day’ has now occurred and it is safe to say that markets are not big fans of how the day unfolded. As we write this, futures markets in the US are down in the 3% to 4% range, keeping in mind that markets these past few months can and have been turning on a dime, or rather turning on a tweet.

Before we dive into the actual decisions that have been made on tariffs, it might be helpful to first understand what markets were expecting or hoping for. Probably one of the biggest hopes coming out of ‘Liberation Day’, regardless of tariff rates, was just a bit more certainty. Even if the tariff amounts were ‘bad’, markets were at least hoping for a starting point that can be understood, relied upon, and then be worked back from. It seemed something in the 20% to 25% range was a worst-case type of scenario, some of which was already getting priced into markets. So, even with a 20 -something tariff being a ‘worst case’, the markets would have found some solace in at least knowing this was the amount and being able to move forward with it. Heading into the day, it appeared like a more scaled back but simple approach of a 10% across the board tariff was being floated. Regardless, markets had a bit of a range of outcomes. Of course, markets got none of this from the tariff announcement. Rates were actually higher than expected in a lot of cases and we were probably given less certainty, not more, as there appears to be carve outs, exemptions, and unclear terms on how, when, or if some of these decisions get rolled back. On the bright side, Canada comes out as a bit of a relative winner so far with any additional tariff decisions being delayed, but uncertainty remaining elevated.

Here is the White House Fact Sheet: https://www.whitehouse.gov/fact-sheets/2025/04/fact-sheet-president-donald-j-trump-declares-national-emergency-to-increase-our-competitive-edge-protect-our-sovereignty-and-strengthen-our-national-and-economic-security/

Some key points:

·       10% tariff on all countries effective April 5

·       Specific reciprocal tariffs take effect April 9

·       There is some squishiness along the lines of the government being able to increase, reduce, modify at their discretion or if countries take steps to resolve the issue.

o   While flexibility is helpful, this seems to just add to the uncertainty and confusion of what is being sought to conclude the tariffs.

·       Some exemptions were included:

o   Steel, aluminum, autos and auto parts already subject to certain tariffs.

o   Copper, pharmaceuticals, lumber and semiconductors

o   Bullion

o   Energy and other critical minerals that are not available in the US

o   For Canada and Mexico, USMCA goods remain at a 0% tariff, non-compliant goods are at 25% and energy and potash get the minimum 10%.

In the fact sheet, the ‘Golden Rule for Our Golden Age’ is referenced where the US is ‘simply’ asking to be treated like they treat others. This seems fine and fair in concept but adding to this confusion is that the reciprocal rates aren’t actually on tariff rates but a calculation related to the deficit each country runs with the US. This goes back to the earlier point that the actual rates being applied (within reason) matters less than just having some clarity and understanding of what is driving the decision making (and in turn how to rectify it). For some certainty, commentary from the White House seems to indicate that this is the worst case currently and it should only get better from here but again with uncertainty being the default option, it gets harder and harder for others to trust this. One interesting line as you go down the fact sheet is this:

“This builds on his broader economic agenda of energy competitiveness, tax cuts, no tax on tips, no tax on Social Security benefits, and deregulation to boost American prosperity.”

You can sort of see the linear path being targeted from the US perspective along the lines of increase revenues via tariffs, cut taxes and (hopefully) worst case they offset each other and best case it’s a net win to the US. One major risk here of course is the uncountable number of unintended consequences that occur and how all other countries decide to respond to this.

Speaking of unintended consequences, while the policy goals might be noble at face value, the way it has all evolved might be the biggest unintended consequence. One clear example is a general goal has been to reduce reliance on China and companies responded by reshoring to Vietnam. However, Vietnam also got hit with large tariffs. This almost goes against their own policy goals. Companies have put in the time, effort, and money to move supply chains only to find out that its not good enough and that it all needs to ‘come home’. The only problem though is that no one is sure how long these tariffs will last and once when investment decisions are made (like building plants in the US), how do they know that Liberation Day 2.0 doesn’t get pulled on them and they get punished again once they have made investments in the US (or maybe other countries retaliate in other ways as well). Overall, it adds to a lot of instability that probably only hurts the policy goals of the US and makes it more difficult to reach the desired end result.

Takeaways:

The first takeaway is simply that this all has only very recently been announced and as we have seen in the past, the actual implementation can and has changed in days or weeks after some announcements. So, it is very fluid for better or worse.

The second takeaway is that using the 10% baseline tariff only, this would be maybe a not ideal outcome but something most/all economies can deal with. Adding to this, a lot of countries likely have an ability to get these reciprocal tariffs either reduced or eliminated in the coming weeks (but again you might get unexpected reactions from some countries, and US openness to this is unclear still).

Third, there are likely some offsets coming from a US perspective whether it is softening on the stance, lower interest rates from the FED, or moving forward on tax cuts.

Fourth, while uncertainty remains the word of the month, all of this can be reversed with the stroke of a pen. This is not the same type of uncertainty as say COVID. This is self-inflicted and in theory can be reversed. The main risk here is if it stagnates and festers leading to problems that are harder to reverse (which is possible).

Finally, from a Canadian perspective, it looks like we are emerging relatively unscathed (so far).

Enough about macro though as it is the individual companies that drive the markets and this is what we think is the silver lining. Prior to Liberation Day, there were already some compelling opportunities. After Liberation Day, we think investors should be getting their pencils very sharp because we think it will present some very interesting long-term opportunities for investors. If these policies stick and it leads to some level of a recession (still an ‘if’), we think this was already being priced in to some degree depending on which areas of the market you look at. While it is hard to paint the tariffs in much of a positive light, the downside scenario as things stand now is likely some level of a recession that is self inflicted, reversible, and partially priced in. This is something that growing companies with strong balance sheets should be more than able to emerge from. In turn, dusting off that watchlist likely makes sense at this stage. If we frame it in a different albeit imperfect way, if companies can recover and charge to new highs on a global economic shutdown in COVID, they can probably adapt and get through Liberation Day as well.

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*Please keep in mind given the fast changing nature of this whole tariff timeline, there may have been material developments or changes since the time that this was published.

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