To my clients:
It was an up week for North American stock markets with the Canadian TSX finishing up 1.7%; the U.S. Dow Jones Index finishing up 5.0%; and the U.S. S&P 500 finishing up 5.7%.
What a week, with huge developments on both the political/tariff front as well as in the markets. There were also notable developments in economic data. Given developments, this week’s update could easily be a candidate for my longest ever, but I don’t think most clients want that, so I will try to be somewhat more succinct.
So, what happened and what are the implications? As mentioned in last week’s update, on April 2nd Trump announced “reciprocal” tariff rates against its global trading partners. While there is merit to Trump’s claim that the existing global order in trade is “unfair” (or, at least, unbalanced) to the U.S., the proposed reciprocal tariffs and, particularly, the calculation of said tariff rates, seemed divorced from reality. The egregiously high rates proposed were much higher than markets had anticipated and it led to a very steep market sell-off last week.
Fast forward to this week. Markets continued the downtrend on Monday and Tuesday and fears were growing that Trump would drag the global economy into recession. And then came the development that everyone continues to talk about – Trump’s announcement of a 90 day pause on reciprocal tariffs (above a 10% baseline minimum) for all countries except China which saw its tariff rate increased above 100% (it currently stands at 145%!). Trump rationalized the first part of his move by saying “more than 75 countries” had approached the U.S. to negotiate trade deals and that a pause was needed to conduct these negotiations. He rationalized the latter by noting China’s tit-for-tat retaliatory increases to its own tariff rates against the U.S. and that China’s decision to retaliate, and not negotiate, meant it should be singled-out for particularly harsh treatment. Markets immediately ripped higher as global tensions (ex-China) were dialed back.
Whatever one might think about the inelegant, clumsy and arrogant manner in which Trump brought the world to a near breaking point on Wednesday of this week (and I hope the three adjectives I chose make clear my own thinking on the topic), I must admit I found the move in the moment to be strategically admirable. With one announcement, Trump opened the door to negotiated trade settlements with 99%+ of the world’s countries while isolating its main trade (and political) nemesis – China. In conversations with clients, I likened the situation to playing a chess match with a younger child not particular adept at the game who might make a series of haphazard and poorly planned moves, but then, out of the blue, makes a move (whether lucky or considered) that makes you sit up and go “hmmm”.
China has long-term aspirations for global leadership and President Xi cannot be seen to be weak. I do not believe he will allow himself to be seen as capitulating to U.S. pressure. But I also know that tariffs of over 100% (against both the U.S. and China) will effectively shut down the vast majority of trade between the world’s two biggest economies and cannot persist for long. My guess is that in the coming weeks a face-saving way will be found for China to enter trade negotiations. I certainly hope so anyway.
For the shorter term, I think market risk is skewed to the upside. Any incremental developments on trade, such as an announced trade deal in principle with one or more countries will likely further fuel market recovery. More to the point, any hint that China and the U.S. will enter negotiations would likely see a Wednesday-type melt-up market reaction. On the flip side, the longer China holds out, or deals in principle with other nation are not announced, the more likely markets will continue their slide.
A few additional points:
Treasury Secretary Scott Bessent, a respected former Wall Street hedge fund manager, took center stage in announcing Wednesday’s tariff pause (and apparently was instrumental in formulating the chess move I described above). For me, the more Bessent is involved in ongoing policy and the more trade advisor Peter Navarro is pushed aside, the better. Navarro’s economic perspective is archaic and reminiscent of a trade approach one would expect in the year 1875, not 2025.
If we can muddle our way through the ongoing tariff turmoil, remember that two huge market-friendly policy initiatives wait in the wings – corporate tax cuts and corporate deregulation.
So too can the Federal Reserve provide support via rate cuts if needed. Comments from the Fed earlier today suggest it is considering just that.
On economics, inflation actually ticked lower in March (this was a welcome surprise, although it’s sure to tick higher in the months ahead), while weekly jobless claims remained stable. What wasn’t a surprise was that consumer confidence cratered to multi-decade lows owing to the overwhelming onslaught of negative tariff headlines.
That’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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