Peak Trade Pessimism?

Here are some quick thoughts on the recent economic headlines. As of today, nothing has changed The Gardner Group’s long-term perspective of the benefits of investing in equities, especially in the United States. The ability to make money is a beautiful thing……….and America still has that!

Peak Trade Pessimism? Maybe.

• On April 2nd, The Trump Administration announced a 10% baseline tariff on imported goods from most countries and specific, reciprocal tariffs on imported goods from dozens of countries. We won’t dig into the details – there has been plenty of smart reporting already on that front. That said, the level and the breadth of the tariffs to be imposed were much greater than Wall Street expected (for a bit of context, once all announced tariffs go into effect, the US will have an overall weighted average tariff rate of 23%, the highest in more than 100 years).
• That dynamic is reflected in how markets have been trading since the announcement – US, European and Asian stock markets are all sharply lower, while high quality fixed income has rallied as investors seek shelter from the ongoing stock market storm (the yield on the US 10 Year Note has fallen more than 40 basis points to 3.9%).
• Stating the obvious, markets are trying to price in what all of this might mean for economic growth, inflation, interest rates, and corporate profits – that is going to take some time, especially if other countries choose to retaliate with new or incremental tariffs on imports from the US (which China is doing, having announced a 34% tariff on US imports).

So, what should investors do – if anything?

In the portfolios The Gardner Group is responsible for, we don’t think selling US stocks at this point makes sense – the S&P 500 is back in correction territory, down 16%+ from its peak; the Nasdaq Composite is in bear market territory, off 21% from its all-time high and small cap stocks have fallen 25% from their 52-week high. Sitting tight isn’t an easy thing to do during times like this, but we are doing so, as it concerns our exposure to US risk assets.

And we think letting our ex-US equity exposure ride also makes sense….European economies will clearly be hurt by a more difficult, unsettled trade construct, and those markets have sold off sharply over the past two days, but we continue to think risk assets there are supported by attractive valuations and fiscal policy reforms that are likely to spur greater economic growth going forward. High-quality fixed income has also performed well year to date, and we would expect that to continue, and we take comfort in the fact that investors want to own US government bills, notes, and bonds. 2025 has been a year, so far, where owning broadly diversified portfolios has paid some dividends.

From an economic perspective, we think the narrative on Wall Street will shift to concerns over stagflation, that new tariffs will push up prices for companies and consumers while further hurting sentiment and spending, leading to a spike in inflation and a fall in US GDP. That isn’t preordained, but the odds of entering a period of stagflation and the odds of a US recession have increased (it is almost a certainty that the US economy shrank in Q1, as our trade deficit spiked as companies sped up imports ahead of expected new tariffs – a trade deficit detracts from GDP growth).

While Fed Chairman Powell commented on April 4th, that he is concerned about the inflationary impact of proposed tariffs, we still believe that the latest developments on trade make it more likely than not that the Fed cuts rates this year and more times than the two times they have guided to…the Fed has a dual mandate – price stability and full employment – and while they are right to be concerned about the inflation implications of these new tariffs, we think they will ultimately be more concerned about the outlook for the economy and labor market. We find it interesting that the market is pricing in four rate cuts.

We think it is worth noting that President Trump mentioned the need to cut taxes several times during his remarks on April 2nd. If the Administration is done–for–now – as it concerns trade, Republicans in DC can focus on extending and expanding the 2017 Tax Cut & Jobs Act – and any progress on that front should be most welcomed on Wall Street.

A pessimistic take on where we are today is that other countries will retaliate meaningfully against the latest tariffs to be imposed by the Trump Administration, and the US economy will be entering a period marked by higher prices and low to no growth (again, something akin to the stagflation we experienced in the 1970s)….an optimistic take on where we are today is that while what the White House is proposing on trade and tariffs is much more severe than expected, it represents the point of peak trade pessimism, that we will begin to enter into bilateral negotiations on trade with other countries, that we will never see tariffs at the levels they have been proposed, that any negative shock to the US economy will be short-lived and that the focus in DC will now shift to cutting taxes and putting in place a much more benign regulatory construct, developments that will boost consumer and corporate sentiment, and ultimately risk assets. We are not sure where we will land. In the meantime, staying in the market, staying with a diversified portfolio, giving all of this some time to play out, makes the most sense to us.

Finally, we take some comfort in the fact that new, proposed US reciprocal tariffs don’t go into effect until April 9th (and the recently announced Chinese tariffs don’t go into effect until April 10th).

The Gardner Group hopes you found these comments of value. As always, please contact us if you have any further questions or concerns.