Q2 2025 Market Commentary: Tariffs
This information is meant to be a commentary regarding Consilio Wealth Advisors’ views on the relative attractiveness of different areas of the market, contrasted with our current asset allocation strategy for the near term, 12-18 months.
These views are always made in the context of a well-diversified portfolio and are not meant to be a recommendation to buy into or sell out of a particular area of the market. These views can and will change as new information becomes available, and we will periodically update this brief to keep you informed of changes.
First Quarter Review
We’re going to cheat on the quarterly newsletter a little and extend the definition of a quarter. If we focused on market performance ending on March 31st, we’d be missing out on heavy market moving headlines since then.
On April 2nd, dubbed “Liberation Day”, an announcement was made on “reciprocal” tariffs that was intended to target countries that have tariffs on US goods. Leading up to “Liberation Day,” the expectation was the administration was going to match tariffs rates and be done with it. What we got was a much higher than expected tariff across the globe, including against countries that don’t have tariffs on US goods. Yes, that includes an uninhabited island that was slapped with tariffs.
The announcement set a universal tariff of 10% on ALL imported goods coming to the US. To be clear, US businesses and consumers pay the tax, not exporting countries. In addition, there was a list of countries set for much higher tariffs based on the trade imbalance it has with the US.
Vietnam was slapped with a 46% tariff even though their tariff on US goods averaged 9.5%. The market viewed this as a massive negative surprise because the announcement was way worse than the expected “reciprocal” rates. There’s a trade imbalance with Vietnam because we buy more Vietnamese-produced goods than they buy US-made goods. That’s because the US economy is massive when compared to Vietnam. We simply consume more.
The S&P500 touched bear market territory, down -20% at its worst. The tech heavy Nasdaq bottomed out at -23% down. The markets rebounded when most announced tariffs were delayed for 90 days, the exception was China where we have a 145% tariff as of this writing. On the delay announcement, the Nasdaq notched its second-best day in history, going up 12% in a single day.
Tariffs have historically been used with the intent to protect domestic manufacturing and production. The promise is the same for this iteration of tariffs, but we have to deal with another job stealer: robots. If companies reshore factories, it’s almost a given that most of the “jobs” provided will be filled by automation.
That’s not to suggest that US interests shouldn’t be protected. There just might be better ways to approach this.
To exacerbate the issues with tariffs, the administration has frequently announced new tariffs and paused previously announced tariffs. The constant whipsawing is causing businesses to pause. They simply don’t know the price they’re having to pay.
Automobiles
Of the many tariff announcements, the automobile tariffs seem to be the most consistent at this point.
As of this writing (we have to say this a lot because of all the changes to tariff policies), there are 25% tariffs on imported steel and aluminum. While the majority of automakers plan to eat the increased costs, shareholders will only be so patient. This is already a low margin business, and to eat a 25% increase on a production component, automakers won’t survive too long.
Reshoring manufacturing would require many years to build factories here. How can a company make such a commitment if tariffs are constantly changing? Assume they do follow through, the increased labor costs of the average US automobile worker ($38/hour) versus the average Mexican automobile worker ($3.50/hour) 10x increase in labor costs. Again, a charitably inclined Ford might eat these increased costs but that will eventually hit consumers with higher prices, lower quality, or lower features. Any manufacturing company in the US would seriously consider looking to fully automate their factories.
While we support the idea of bringing back 1950’s era jobs, it doesn’t look like the way forward. What’s gotten away from the American worker is the cost of living, and good paying jobs are a big piece. It doesn’t need to be manufacturing that brings back upward mobility, rather a system that allows workers to adapt to an evolving economy.
Bonds and Rates
The bond market has shown little patience in tariff policies. Rates and yields have gone up significantly as US debt holders are selling their holdings. The US treasury has long been considered a safe haven asset is not holding up during the stock market sell off.
During the Great Financial Crisis, treasuries were up nearly 34% while the S&P500 was down nearly 37%.
During Covid, treasuries were up nearly 18% and the S&P500 was down nearly 15%.
Safe haven assets are there for when things go bad. Unfortunately, not this time around. When investors sell risk assets, they usually park those proceeds into what they consider safe, historically US treasuries. When the demand rushes in, interest rates are pushed down, making borrowing costs lower. When Trump and team saw this was not the case, they quickly walked back most tariffs.
The demand for US debt has eroded, which in turn has pushed our rates higher, therefore the prices of treasury bonds lower. There’s little doubt the volatility was caused by the US and the world has responded. Normally, when rates go higher it pushes the dollar to be stronger relative to other currencies. The dollar has also weakened as interest rates have gone up. That’s an indication that investors are selling the US wholesale. Erosion of confidence is quantifiable.
There will always be buyers of US debt, mainly from individuals and institutions based here. A life insurance company would love to lock in 5% rates for 30 years with little to no default risk. The same applies to pension funds and endowments.
Mortgage rates have also risen toward 7%. The 30-year fixed mortgage rate is influenced by the 10-year treasury rate. If the 10 year rises, mortgage rates will rise and vice versa. A curious trend is happening where mortgage rates are pricing in a greater premium than what 10 year treasury rates should suggest. Mortgage rates being so high has created a lock-in effect where people in homes now aren’t willing to trade in their 3% mortgage for one that is more than double. This is limiting housing supply and extending this sellers’ market.
If policy decisions were intended to loosen financial conditions and lower rates, consider this mission unaccomplished. Many of us are getting a sense of how interconnected everything is. As the US needs to rollover outstanding debt, the last thing we need are higher rates. The cost of debt service has gotten much higher.
Looking Ahead
Expect volatility to remain elevated. There needs to be consistent trade policy and we’re currently living through an escalating trade war between the US and China (as of this writing).
We tend to be optimistic about year-end results because the tariffs can end as fast as they were enacted. Agreements that mutually benefit both sides are made, and the world settles back into its flow.
Looking at markets through a long-term lens, sell-offs generally are buying opportunities. You could be thinking that the administration is steering us into a ditch, but it might benefit you to steer into the skid. While we don’t know when the bottom is, the market is presenting a buy lower opportunity. The associated risks are known and could already be priced in. However, things may get worse, and more pain could be coming. Years from now, it won’t matter if you nailed the bottom or if you were too early. It usually matters if you’re too late.
Stay fully invested. That’s not to say shifting some investments around is out of the question, rather drastic movements like going all cash don’t normally yield great results. When to jump back in is the issue. Most people wait for an “all clear” but by that point the market has already moved forward.
Expectations are incredibly low now, and bad news could still trickle in. The market response could still be positive if that bad news isn’t as bad as expected. Tariffs could be rolled back or reduced. As of this writing (there it is again), there have been several exclusions for computers and smart phones imported from China.
If tariffs remain as they are, expect the rest of the world to alter trade agreements that are likely to leave the US out. While we still have the best companies in the world currently, there could be investment opportunities to sprout up internationally.
US debt could potentially rebound and behave more like a safe haven. The alternatives so far have been the German bonds and gold. Diversification is nice but Germany’s economy and its available debt are not big enough to replace US treasuries. Gold has been a winning trade because of massive central bank demand, particularly from China and Russia.
DISCLOSURES:
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
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