“There are decades when nothing happens; and there are weeks where decades happen.”~ Vladimir Ilyich Lenin
We’re now 120 days or so into the new administration and it has been anything but uneventful. Since “Liberation Day” on April 2nd, the S&P crashed and the 10-year treasury sold off, from 4.00% to 4.50%[1]. And while market performance is very important to what we do as wealth managers, the main story is more complex and still being written—a potential tectonic shift in global trade and the global monetary order. We’ll try not to be partisan (give the administration the benefit of the doubt without a free pass). Our founders are KU grads, so we like red and blue.
What is going on?
DJT has thrown a wrench in the works of global trade. Why? We believe that this is more than just a hiccup in the market, but an attempt at a real paradigm shift on the level of the 2001 tech bubble, 2008 mortgage (then credit) bubble and CV19.
The economies of the US and China are intimately linked. The US account deficit (the US imports more goods and services then it exports) is the Chinese account surplus (China exports more goods and services then it imports). The US supplies the world with dollars to maintain the trade system, and the world (China et al.) supplies the US with stuff. Or more crudely, China needs the US to buy its sh*t (to be fair, China has become better and better at high-end-manufacturing), and the US needs China to buy its sh*t (treasuries, although China has also invested in a wide variety of other assets). This was a good arrangement for decades, until it became clear that it is not optimal for China to use the US as it’s store of value. Afterall, what if the US decides not to pay China back? Or simply creates new money to pay off China? Or what if China uses the system to make the US dependent on Chinese supply chains, particularly for industries that the US military might require? Getting off this hamster wheel will take force (sabotage?). Enter DJT and tariffs.
As of writing, the US will place a 10% baseline tariff on imports for all countries, with additional reciprocal tariffs on specific nations based on their tariffs on the US. China was initially singled out, with a tariff level of 145% (my understanding that over 50% tariffs result in an effective embargo). However, in mid-May both countries agreed to a 90-truce, reducing U.S tariffs on Chinese goods to 30% and Chinese tariffs on U.S. goods to 10%. July.It’s anyone’s guess where these tariffs will finally land, and perhaps that’s not even the point. The OvertonWindow regarding US trade with the world has shifted, and everything is up for negotiation. And while some deals may be forthcoming, the administration’s rhetoric has already started to focus more on the tax cut bill.
UPDATE: on 5/28/25 a federal trade court ruled that sweeping tariffs were illegal. Whether or not that decision is enforced or upheld remains to be seen. Trump may need to get Congressional backing to push the full tariffs forward.
WHY?
There are multiple theories on why the Trump admin is taking such a drastic stance:
Political: help out Main Street. If we take the administration at face value, tariffs are intended to bring back manufacturing to the US. As Scott Bessent has said “Wall Street has had a really good four years, and now it’s Main Street’s turn.” It’s too early to see how much manufacturing will come back, but obviously moving factories and finding labor takes time.
Fiscal: the tariffs are a tax on imports paid by importers,who then pass on the tax (mostly) to consumers. Estimates are that tariffs will bring in $100B to $300B, depending where actual tariffs land. How much this really matters will become apparent when we see the end state of tariffs. Note, the US is looking at a fiscal deficit of $1.9T in 2025.
Strategic: when you ask people “what backs the dollar?” you often get a responsealong the lines of “US military might.” But as macro analyst Luke Gromen has observed on X:
So decreasing dependency on China also serve a strategic purpose, particularly if an armed conflict is a real possibility. China’s recent ban on allowing the US access to rare earth metals (used by the US military) found in China underscores this point.
Will it work?
Who holds the cards? Safe to assume that the Trump administration believes it is in the driver’s seat. After all, the US owes China $800B. Like the adage says: If you owe the bank $1,000it’s your problem; if you owe the bank $1,000,000,000, it’s the bank’s problem. On the other hand, actual wealth is found not in promises and pieces of paper, but real capital, manufacturing.
One important dynamic here is who can take more pain: China or the US? China is a communist regime; the US is a democracy. Trump has midterms in 2026 to contend with, whereas Xi Jinping doesn’t. Assessing the state of China’s economy can be difficult. Some observers see China in a recession already, and much of its recent economic growth was tied to the US.
Another framework for considering tariffs comes from analyst Lyn Alden. She considers three aspects: did Trump have a mandate to do this, is this a good plan, and how has it been executed? She concludes that based on Trump’s strong victory he has a mandate to look at global trade imbalances and how that has affected wealth inequality in America, and the plan, at least as composed by economic advisor Miran was indeed thoughtful though not perfect. As regards to the execution…well that has left something to be desired.
What does this mean for our clients?
Big picture – be ready for more volatility. After two years of 20% plus performance by the S&P, a threepeat would be a tall order. Add tariff uncertainty and a possible economic slowdown, and we see a challenging environment for equities without some fiscal stimulus. Of course, fiscal stimulus affects the deficit, and the bond market may have something to say about that. For long-term investors, volatility is a benefit; good companies will become compelling opportunities when their share prices are beaten down by macro factors. For retirees, higher yields in the post-COVID era are offering a decent stable return.
In the week following the tariff announcement, the S&P plunged almost 15%. Since then, it has fully recovered, is up from April 2nd and essentially even on the year.Interestingly, the US 10-year bond yield initially fell after April 2nd (acted as a safe haven, like bonds should), but then began to sell off, rising 50 basis points in a week.This significant move, more than the stock market dip, likely contributed to Trump putting a pause on tariffs. The 10-yearcontinues to move higher and came in as high as 4.60% on May 22nd [2]. Higher yields could be a drag on equities if investors decide that the returns on bonds are more attractive than stock returns at already elevated P/E ratios. We will be watching to see how the market reacts to the new tax bill working its way through congress. It is possible that the market views any increase to the deficit as negative and demands a higher return on government debt. It’s also possible that reduced corporate taxes mean higher profitability, and better share price performance.
Gold and bitcoin are at or close to all-time highs, suggesting appetite for assets that are insulated from inflation risk and credit risk.
We continue to preach diversification across asset classes and countries. As tariffs take effect, this should reduce the US trade deficit and potentially cause some rotation out of US markets from foreign investors. This will be a headwind for both equities and bonds. Exposure to Asia and Europe should help, as well as exposure to certain commodities and neutral reserve assets. Of course, we have a soft spot for alternative assets that have a low correlation to the overall market as well.