The LTWM Insider – Market and Economic Commentary Q1 2025

The first quarter of 2025 was strong for international stocks and weak for U.S. stocks, but those results were completely overwhelmed by the escalating tariff conflict in April. Let’s discuss what’s driving second quarter returns!

The Escalating Tariff Conflict

In early April, President Donald Trump announced "reciprocal tariffs" on Chinese imports, raising duties to 145% on most goods. This move aimed to address longstanding trade imbalances and perceived unfair practices. China swiftly retaliated by imposing 125% tariffs on U.S. imports and restricting exports of critical materials like rare earth elements, essential for various high-tech industries. New 10% tariffs on most of the world, and increased tariffs on Canada and Mexico all played a role here, too.

Economic Impacts

United States

• Currency Fluctuations: The U.S. dollar has weakened by over 4% against most major currencies, contrary to expectations of strength amid rising inflation and bond yields. This decline reflects investor concerns about economic stability and the tariff escalation driving traders away from U.S. investments.​ Normally, U.S. Treasury bonds are a safe haven during time of crisis, but not during this trade war.

• Trade Disruptions: Exports to China, valued at approximately $150 billion, are expected to decline significantly due to the new tariffs, affecting various sectors including agriculture and manufacturing.​ 

• Financial Sector Strain: Investment banking activities have slowed, with major firms like Goldman Sachs and Morgan Stanley initiating small job cuts in response to decreased deal volumes and revenues related to mergers and IPOs.​ At the same time, both firms have reported record trading revenue.

China

• Export Surge Pre-Tariffs: In anticipation of U.S. tariffs, China's exports surged by 12.4% in March. However, analysts predict a sharp decline in future trade volumes due to the imposed duties.​ 

• Economic Challenges: China faces a fragile economy and a cooling property market, which, combined with the trade war, pose significant risks to its economic stability.​ 

Stock Market Reactions

The stock markets have experienced heightened volatility:​

• Market Declines: The Dow Jones Industrial Average fell by 1,679 points (4%) on April 3, marking the steepest decline since 2020. The following day, it dropped an additional 2,200 points, with the Nasdaq entering bear market territory.​ This past Wednesday, with over 70 countries looking to start negotiations with the U.S., the stock market gained over 7% in one day on the news the tariffs would be delayed for 90 days. And more recently, the bond market has sold off substantially, increasing yields, which affect mortgage rates and auto loans, making them more expensive. All aspects of the fixed income markets are functioning well, which is a good sign for stocks.

• Investor Sentiment: The uncertainty surrounding the trade conflict has led to increased market volatility, with investors closely monitoring developments for potential impacts on global trade and economic growth.​

Global Implications

The mutual imposition of high tariffs between the U.S. and China resembles a trade embargo, disrupting global supply chains and affecting international markets. Countries worldwide are experiencing economic repercussions, with some seeking to realign trade partnerships and diversify markets to mitigate the impact .​ Currently, the White House is prioritizing negotiations with the countries near China, including Japan, Vietnam and South Korea to keep the pressure on China to come to the table.

Outlook

While both nations have shown a willingness to engage in negotiations, the path to resolution remains uncertain. Temporary exemptions for phone, computers and certain electronics; and pauses in tariff implementations suggest strong potential for dialogue, but sustained economic pressures may be necessary to drive meaningful agreements.​ Currently, the White House is in discussions with more than 75 nations with the goal to remove trade barriers for U.S goods overseas and to promote the purchase of U.S. products, aiming to reduce the trade imbalance with each country. The ultimate goal is to encourage corporations to invest in high-tech automation in the U.S. if products are going to be sold domestically, while simultaneously promoting U.S.-made goods to our international trading partners. A change of this magnitude fundamentally reshapes our trade system and will require time to implement. The goal is to keep manufacturing of strategic products in the U.S., like weapons, high technology, food and health products, while requiring fair trade for access to the very large U.S. marketplace. So far, volatility, orderly function of fixed income markets and junk bond spreads are reasonably contained.