Economic and Market Update
We’ll start this Quarterly Update with a cursory review of the economy and markets through Q1 before turning to comment on what’s happened since the end of the quarter.
Coming off relatively strong growth in Q424, the U.S. economy is expected to fall into negative growth when the first measurement for Q1 comes out. The Atlanta GDPNow forecast is for negative 2.8% growth.[i] However, some context is important. GDP is calculated by adding together consumer spending, government spending, business investment and the trade deficit. Since the trade deficit is a negative number, it detracts from GDP growth. During January and February, and likely continuing through March, companies accelerated imports to get ahead of Trump’s tariff announcement. As a result, the trade deficit soared from an estimated contribution of -0.41% prior to the January reading to -4.7% by April 3rd. If we ignore the anomalous jump in imports and keep the “normal” trade deficit of 0.41%, the GDP growth estimate would be net positive at 1.45%.
The labor market also continues to be healthy as the economy added 228,000 jobs in March.[ii] The March estimate does come with downward revisions to January and February, bringing the run-rate of new jobs to about 150,000/month. The unemployment rate was basically unchanged at 4.2%
Inflation reporting was somewhat mixed, but consistent with stable to lower inflation. The February CPI report (latest available) came in at 2.8% over the prior 12 months, down from the January reading of 3%. The Fed’s preferred inflation gauge, PCE, stayed level at 2.5%, while core PCE came in a little hotter than expected at 3.1%.
Equity markets continued a rally which started with the Trump election through mid-February with the S&P 500 rising about 4.5% through February 19th. From that point, as talk of tariffs and layoffs throughout the government picked up, markets started to trade down. By the end of the quarter, the S&P had given up year-to-date gains and turned negative by roughly 4.3%. In general, portfolio returns were ahead of the S&P owing to positive returns in international developed stocks (+5.4% – MSCI AC World Ex. US), emerging markets (+3.0% – MSCI EM) and fixed income (+2.76% – AGG ETF).
Of course, the relevant recent market movement at the time of this writing are the two days following Trump’s tariff announcements. Over the two-day period following the announcement, the S&P 500 traded down 10.5% and is off 17.5% from the Feb 19th high. This takes us back to May 2024 trading levels.
The worst performing stocks during the nascent downturn have been cyclical stocks (stocks with higher sensitivity to economic growth) and large growth stocks which arguably were trading at too-rich valuations. Value, as measured by the Vanguard Value ETF, is trading down 7.3% YTD through 4/4, while the S&P is down 13.8% and growth, as measured by the Vanguard Growth ETF, is trading down 18.6%. International stocks are only slightly negative YTD, boosted by a weaker dollar, and investment grade fixed income remains positive as rates are under pressure.
Liberation Day – Trump Attempts to Remake the Global Economy
Trump campaigned on using tariffs to increase tax revenues and to force foreign countries to the negotiating table for various offenses. Some of those offenses are non-trade related, such as the amount of fentanyl or migrants crossing the border, but for most, the offense is selling more to the U.S. than they buy from the U.S. – a situation which results in a trade deficit. Before we can evaluate tariff policy, we first have to establish whether a structural and growing trade deficit is bad.
Trade itself is not a bad thing, especially where two trading partners have a comparative advantage. For example, consider a country which grows more bananas than its population can consume, so it exports the excess. The U.S. does not have the climate to grow bananas, so it imports bananas. If there is some widget which the U.S. manufactures and the other country cannot, then they import the widget we make and sell us bananas in return. In general, this is a win-win.
What happens when we extend that to a trade deficit vs. the world? In 2003, Warren Buffet wrote an article for Fortune magazine arguing that something must be done about our growing trade deficit.[iii] As he is apt to do, he simplified with an illustration of two island nations which both have very simple economies consistent of eating and growing food. In his example, one of the islands becomes industrious and overproduces food which they then sell to the second island. The inhabitants of the second island are happy to not have to work so hard and pay the producing island with IOUs and/or sale of portions of their island. At some point, the producing island has to start questioning the credit worthiness of the consuming island’s debt, and the consuming island has to start working more to produce their base food need plus the cost to finance the debt to the producing island. It eventually becomes an unsustainable situation where the IOUs have to be inflated away or the producing island ends up owning the consuming island.
Buffet notes that the U.S. used to be a net producer until the late 1970s. By 1980, the U.S. owned $380 billion of foreign assets as a result of trade surpluses. At the time he wrote the article, Buffet estimated foreign ownership of $2.5 trillion, or roughly 5% of the national wealth of the U.S. Since then, our trade deficit has grown and by the end of 2024, foreign ownership of U.S. debt amounted to $8.5 trillion which amounts to roughly 25% of treasury debt outstanding. [iv] That does not include the accumulated value of foreign ownership of non-treasury assets. With the trade deficit recently reaching a run rate of approximately $1 trillion annually, there definitely is an argument to be made that the trade deficit must be addressed.
While there can be broad agreement that the trade deficit should be reduced, or at least stabilized, there’s the secondary question whether tariffs are the appropriate policy tool to remedy the imbalance. These updates are never intended to be partisan, but it is difficult to find anyone who believes tariffs are the appropriate mechanism outside of the current Administration. As JPMorgan’s David Kelly noted recently, “The trouble with tariffs, to be succinct, is that they raise prices, slow economic growth, cut profits, increase unemployment, worsen inequality, diminish productivity and increase global tensions. Other than that, they’re fine.”[v]
The methodology which the Administration used to calculate the announced reciprocal tariff rate has also been largely panned as disconnected from any economic theory. The “reciprocal rate” was pitched as a “they do it to us and we’ll do it to them” equalization of rates. With that, one might assume a country who charges us a 20% tariff on exports would face a 20% reciprocal rate. Instead, the Administration used the trade deficit with a particular country divided by imports from that country to find their tariff rate, then halved it to find the reciprocal rate. For example, the U.S. deficit with China is $295 million, with imports of $438 million. That results in a “tariff” cost to the U.S., according to the Administration, of 67% ($295/$438). The reciprocal rate is set at half, or 34%.[vi]
This sets up a bunch of bilateral rates, and trade cannot be limited to a bilateral relationship. We may have a deficit with country A, who doesn’t need much that the U.S. produces, but they need something from country B, and country B may need something from the U.S. In a world of global trade, these relationships are much more interwoven than a bilateral interpretation allows.
Trump’s main goal is to bring manufacturing which has been lost to foreign markets back to the U.S. This becomes an issue of timing. The tariff policy can be made effective immediately, but it takes time for production to be shifted to the U.S. Factories literally have to be designed, permitted, built, staffed, etc., before the Made in the USA stamp can be affixed. If companies knew the announced tariffs are permanent for the next two decades, the production likely will begin to move. However, it is unclear how many companies will adjust investment when the announced tariffs could be changed by the end of the year, end of the month, or possibly the end of the weekend.
With major capital investment projects which have decades of planned use, companies also have to consider the possibility that four years from now the political pendulum in the U.S. may swing again with a new administration unwinding all the new policies. It is this latter potential to delay investment decisions which have many economists worried that the Trump tariffs may result in exactly what David Kelly notes … slower economic growth (because investment is delayed), higher inflation (because tariff costs are passed on to consumers while domestic producers introduce higher priced because of higher cost domestically produced goods), lower productivity (because capital and labor are deployed in areas where the U.S. does not have a comparative advantage in the absence of tariffs), higher unemployment (due to slower growth and delayed investment), and global tensions (China has already retaliated with a 35% tariff against U.S. imports).
The Federal Reserve faces a conundrum in setting future interest rate policy. On the one hand, economic growth is expected to slow, if only (hopefully) temporarily while the global economy adjusts to the new world of tariffs. On the other hand, inflation is expected to increase (again, hopefully only temporarily). Slowing growth could pressure unemployment and require a rate cut by the Fed, while higher inflation requires the Fed to hold steady or even increase rates.
Implications for Investors
In early March, we published a Quick Market Update which addressed our view on timing the market. The summary conclusion was that we do not believe it is possible, or advisable, to try to time the market.
Our approach to managing money is to adopt a portfolio which is appropriate for each client based on their individual circumstance and ability to withstand market swings. We periodically rebalance that portfolio back to target and we do not attempt to time the market. We typically test those portfolios as part of a financial forecast to determine a client’s probability of long-term success. It is important to understand that such forecasts include an expectation that markets will have negative returns from time to time and the probability of long-term success incorporates those negative returns.
We’ll borrow briefly from Winston Churchill who famously commented on democracy as a form of government as “… the worst form of Government except for all those other forms that have been tried from time to time.”[vii] Adapting the quote to our investment philosophy, we can state that the way we manage money is the worst way to manage money, except for all the other ways which have been tried from time to time.
It is the worst way because it requires investors to endure market downturns and to have faith that a recovery will arrive as it always has done historically. It is the worst way because it requires faith that companies will figure out how to make money in any environment, and over time those companies will grow earnings. By comparison, market timing models may feel better in the short term by providing relief of being out of the market when volatility arrives. They may feel better because it feels good to take action and try to take control of a situation which seems out of control. However, longer-term, these models generally also miss recoveries and on a cumulative basis underperform our chosen investment strategy.
In short, we have adopted this investment strategy because we have not found any other strategies which offer the possibility of limiting downside participation while offering long-term market average returns.
Investors may believe that this time it is different and that a timing approach may be appropriate. We would caution against such a view because we do not have certain foresight into the global economy and capital market reactions. The Trump tariffs may very well be effective in extracting concessions from countries to reduce import restrictions against U.S. products, or commitments from companies to reshore production and invest domestically. That, in turn, could lead to the reward of a reduction of tariffs. Lobbyists on K-Street will also remain hard at work to seek exemptions, and significant market downside along with a rise in recessionary indicators may cause Trump to back off, or Congress to assert authority over trade policy, etc. If the economy does slow significantly, market interest rates should decline which could unlock the housing market. The price of oil has already fallen from $72 to $62, which could have stimulative effects by itself. There are so many what ifs that add to the difficulty of any timing call that simply sticking to the investment strategy may make the most sense.
If you have any questions regarding the content above, please reach out to your advisor.
Disclosure:
The views expressed represent the opinion of Riverchase Wealth Management, LLC. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and nonproprietary sources that have not been independently verified for accuracy or completeness. While Riverchase Wealth Management, LLC believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability.
Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Riverchase Wealth Management, LLC’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in equity securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is not indicative of future results.
Advisory services provided by Riverchase Wealth Management, LLC, a registered investment advisor.
[i] https://www.atlantafed.org/cqer/research/gdpnow#Tab3
[ii] https://www.bls.gov/news.release/empsit.nr0.htm
[iii] FORTUNE, Nov 10, 2003, “America’s Growing Trade Deficit is Selling the Nation Out From Under Us. Here’s a Way to Fix the Problem – And We Need to Do It Now.” https://www.berkshirehathaway.com/letters/growing.pdf
[iv] https://ticdata.treasury.gov/resource-center/data-chart-center/tic/Documents/slt_table5.html
[v] JPMorgan, David Kelly, “The Trouble with Tariffs.” March 3, 2025
[vi] TaxFoundation.org,
[vii] International Churchill Society, Winston S. Churchill quote from November 11, 1947