To my clients:
It was a significantly down week for North American stock markets with the Canadian TSX down 6.3%; the U.S. Dow Jones Index down 7.9%; and the U.S. S&P 500 down 9.1%.
Yes, it’s the first week of a new month but, as I’m sure clients and readers will understand, the Big 3 economic indicators are very far from my focus in this week’s update. I’ll just note quickly that ISM Manufacturing and Services both slowed, and at 228,000 new jobs created, U.S. employment came in ahead of expectations.
Now to the real news – tariffs and trade policy. Leading up to Donald Trump’s “Liberation Day” tariff announcement at 1:00pm on Wednesday, markets seemed to be in a positive mood. Stocks were performing well as many strategists anticipated tariffs would not be as harmful as feared. Even when Trump first started speaking and mentioned baseline 10% tariffs for most imports, market sentiment continued to seem positive as stock futures rose in the moment. However, the optimism was short-lived and sentiment quickly soured once Trump brought out his (soon-to-be infamous) chart of “reciprocal” tariffs. The tariffs proposed were, in aggregate, not better than feared but worse than feared.
Setting aside the specious math in how the tariff and trade barrier totals of the U.S.’s trading partners were calculated, the trade-weighted reciprocal tariffs put in place by the Trump Administration come to roughly 23%. For reference, this compares to roughly a 2% aggregate tariff rate in place at the beginning of 2025, and market expectations that a “worst case” scenario under Trump would be 20%. Moreover, as noted in the previous paragraph, hopes were building that announced tariffs would be better than the worst case and come in somewhere in the 10 to 15% range in aggregate. So to reiterate, announced tariffs came in worse than markets expected and, yes, worse than I had envisioned (myself, I believed some mid-range rate in line with the consensus expectation of 10 to 15% would be rolled out with a threat to increase further if impacted countries did not quickly enter into trade negotiations).
At this juncture, it’s important to note that the existing world trade order was not equal. Per the World Trade Organization, nearly every major U.S. trade partner levied higher aggregate trade barriers (tariffs, duties, taxes etc.) against the U.S. than the U.S. levied in return. Objectively, Trump is not wrong by highlighting this discrepancy and, perhaps, by trying to correct it (note: many of these unequal trading relationships have historical post WWII roots in U.S. alliance building and promotion of democracy whereby the U.S. offered favorable trading terms to other nations in promotion of these objectives). However, the “big stick” methodology Trump is employing in an effort to reset these trading relationships is beyond unsettling.
Yet, might it work? Earlier this morning Trump said that Vietnam was open to negotiations. Rumors are spreading (and, I emphasize, these are only rumors right now) that Vietnam is open to reducing its trade barriers to 0%. IF this proves to be true, might this mean that the U.S. likewise reduces its tariffs against Vietnam to 0 also? Would this set a precedent for other nations to follow? For what it’s worth, in a sea of red ink, the regional Vietnam ETF was up over 3% today on the speculation and Nike, which sources much of its product from Vietnam, was up near 5%. It’s way too early to draw any sort of conclusions from these rumors, but it does offer hints as to one possible path forward.
Of course, another path forward might be a spiraling global trade war. Here one must consider China’s response this morning whereby China announced it will match Trump’s Wednesday announcement of a 34% tariff against Chinese goods with an equal 34% tariff against U.S. goods. Futures markets which suggested stock markets might stabilize today after yesterday’s sell-off quickly shifted once again to steeply negative. So seemingly Vietnam and China look to be taking divergent approaches. But let’s not kid ourselves, Vietnam has no aspirations for global leadership whereas China does. China cannot be seen to be bullied. Even if it might wish to negotiate, it must be seen to be projecting strength, so China’s initial response must be viewed through this lens. I’d suspect that if bilateral negotiated settlements of trade policy are the path forward, China will be the trickiest of these negotiations.
Before moving on, let me again acknowledge that I was surprised by the magnitude of the announced tariffs and the aggressive “big stick” approach adopted. I did not take protective measures heading into the event and I have not sold in these two days of market turmoil. Frankly, I’d view selling in the current environment as capitulation (fancy way for me to say giving in to panic). So, within the context of each client’s own individual Investment Policy Statement, clients have been exposed to this sell-off.
Make no mistake, traction in trade negotiations is important to stemming the immediate market tide, and the sooner the better. But there are three positive market drivers lurking in the wings: 1) extension and/or further lowering of corporate tax cuts; 2) corporate deregulation; and 3) the likelihood of Fed rate cuts later in 2025 (an interview this morning with Fed Chair Jerome Powell suggests the Fed likely won’t act immediately until it can credibly assess the fallout from current tariff policy, but that cuts would certainly be on the table if the economy excessively slows as a result of the tariffs). With respect to #s 1 and 2 (which were major planks in Trump’s election platform), it makes sense that tariffs (another major plank) came first so as to get the bad/unsettling news out of the way first and then “pivot” (a term increasingly being used in the financial press) to the more market friendly policy planks as political attention begins to shift to the 2026 mid-term congressional elections.
It’s been a busy week. It will likely be a busy weekend also as I do further reading and, hopefully, get clarity on what, if any, substance lies behind the Vietnam rumors. I’m sure too that there will be other news and developments. I’ll be assessing all developments carefully.
Hat’s it for this week. All the best,
Nick
Nick Scholte, CIM, FCSI
Senior Portfolio Manager
Scholte Wealth Management
RBC Dominion Securities Inc. │ Tel: 604.257.7569 │ Fax: 604.235.9950
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