April has seen enormous market fluctuations following the unleashing of the White House’s tariff roll-out, roll-back. For the truly passive investor, those fortunate enough to be oblivious to not only the day-to-day fluctuations but the tweet-to-tweet market convulsions, they could be forgiven for not understanding what the fuss has all been about.
From a monthly return perspective, as of time of writing (April 29) with one trading day to go, April looks like nothing particularly out of the ordinary. Month-to-date, the S&P 500 is down only -0.9% the Nasdaq is actually positive at +1.4%, the Dow is -3.5%, showing a little more of the stress of the month that was. Viewed like this, there is no sign that all three indices at a point were down more than -11% a few days after Liberation Day. This impression that perhaps, nothing of significance really has happened could be the greatest problem investors face as they confront the ongoing tariff uncertainty. Looking at the month-to-date returns of course omits the market convulsions, it misses the descent of the markets into chaos and the rebound into deep uncertainty, but this just illustrates the age old investment dilemma: is it the end investment goal, or the journey to get there, that is most important?
Genius, Madness, or Just Winging it?
There are so many ways to look at what has happened. Firstly, is to extol the virtues of a masterful stroke of economic geopolitical strategy. Something along the lines of, it was all bluff and bluster to begin with and it worked. It scared the hell out of other countries, who are now lining up begging for a merciful deal rather than prospect of exorbitant tariffs. It has enforced a reset in the global economic hierarchy, where the US is on top and calling the shots. There was some brief shock and pain, but the stock and bond markets have bounced and recovered thus there is nothing more to worry about.
Then there is the view that this is the beginning of a self-inflicted economic disaster, sowing the seeds of a recession. Much of the “it’s lunacy” critique, unsurprisingly, reflects the polarization of US politics. What is perhaps more interesting is the concern being expressed by more natural supporters of the administration who are troubled by the long-term reputational damage the tariff debacle may have for the US.
There is a third viewpoint, that rather than the administration having a masterplan, the tariff approach is without principle and is completely malleable and it ultimately will be shaped as much by the responses to the policy as by the policy itself, a kind of shake things up and see what falls out. The chaotic way the rollout–rollback has been conducted thus far does seem to give credence to this view.
The Erosion of Trust and Persistence of Resentment
How does the analysis on the long-term effects of what has taken place account for international resentment? Thus far much of the international response has been muted, as countries try and assess how serious/real the tariff threat and impact will be. On the other hand, this resentment has been most vocally expressed by freshly elected Canadian Prime Minister, Mark Carney who during his election night victory speech said, “We are over the shock of the American betrayal, but we should never forget the lessons”. Whatever the trade grievance the US administration has with Canada, the choice to so overtly attack and attempt to humiliate it, has resulted in that feeling of betrayal. It is clear that this message has been absorbed by every other country across the world, that quite simply the US, as a trading partner, cannot be trusted.
The sudden transformation of the US, for its allies, from a friendly nation into a nation to be feared will have long-term ramifications. This is fertile ground for international resentment towards America to fester, particularly among those allies.
If the China tariffs remain at their current levels, then there is ample room for other countries to partially fill the potential import vacuum that the absence of many Chinese imports will create. If simultaneously this is accompanied by higher pricing, international exporters to the US (excluding China) may well benefit from the situation, even with the general elevated tariffs at the 10% level.
Fear of tariff impact on US consumers should not be underestimated. Similar to the effects of perception of inflation on inflation. The fear of tariff impact causing shortages or higher prices, can contribute to a self-fulfilling prophesy of economic gloom. In this scenario, it will be domestic resentment that the administration will face.
If tariffs appear to be stimulating an economic downturn in the US, then when it comes to negotiating a new trade deal, strategically stalling and elongating the process could be advantageous for other countries.
As April comes to a close, there remains an extraordinary level of unclarity about what will happen next. In that context, the rebound in the stock market looks particularly disconcerting. It would appear that the markets assume they have already priced in that uncertainty, however, given lag in experiencing the effects of all of this on the real economy and the potential anger among domestic consumers combined with the angry international dynamics bubbling below the surface, the question will be, has the market properly priced in the power of resentment? ■
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