Recalibration Day
As we approach April 2, what President Trump has referred to as “Liberation Day”, when a number of tariffs will be levied on a range of countries, we look at why investors must be prepared to recalibrate.
Investors are girding themselves for what could potentially be a big source of market movements approaching April 2.
Tougher-than-expected tariffs could weigh on asset returns, while softer-than-expected tariffs could produce a market rally. A muted market reaction would in fact be a surprise.
Whatever happens, April 2 will cap a 10-week whirlwind news and information cycle where the markets had to process, in real-time, shifting policy decisions and their impacts on both economic and fundamental cash flows. As a result, since the start of President Trump’s term, we have seen numerous tariff-related announcements sparking higher volatility in both equity and bond markets.
| Date Announced | Tarrifs | Enacted? |
|---|---|---|
| US Tarrifs | ||
| March 26th | 25% automobiles & auto parts | Yes |
| March 25th | 25% on countries importing Venezuelan oil | No |
| March 4th | China: 20% | Yes |
| March 1st | Timber & Lumber | No |
| February 25th | Copper | No |
| Februrary 13th | Reciprocal on all | No |
| February 10th | 25% steel & aluminum | Yes |
| February 2nd | All EU goods | No |
| February 1st | Canada: 25% most goods, 10% oil & gas; China: 10%; Mexico: 25% | Yes |
| Reciprocal Tariffs | ||
| March 12th | EU: some goods (@$5 bn), some U.S. steel & agricultural (@$20 bn) | No |
| March 12th | Canada: 25% on some goods (@$21 bn) | Yes |
| March 4th | China: 10-15% tariffs on U.S. meat & agric., suspension of U.S. lumber imports, soybean for 3 U.S. firms | Yes |
| February 1st | Canada: 25% on some goods incl steel & aluminum (@$21 bn) | Yes |
| February 1st | China: 15% tariff on coal &LNG, 10% on oil and agricultural machines | Yes |
Source: State Street Global Advisors.
US markets were most impacted by this swirling vortex of macro uncertainty stemming from the shifting views of US policy makers. US equity markets started the year off strong, peaked in mid-February, then dipped into correction territory by mid-March before rebounding in recent weeks. Year-to-date, the S&P 500 Index is only down 3%, which seems almost remarkable at this point.
While the US has oscillated between gains and losses, international markets have really only experienced gains this year. Eurozone and Chinese equities have been some of the brighter spots, despite being the central target of the tariff announcements.
“Liberation Day” Means Recalibration
Like a GPS trying to adjust its route after a few unexpected turns, sentiment continues to readjust to each turn in tariff news. Amid this backdrop, in our tactical models we shifted between buying and selling US equities in recent weeks, opportunistically taking advantage of these changes in sentiment.
Specifically, we considered the difference between sell-side upgrades and downgrades to sales and earnings. Over recent months, we have seen figures for the US deteriorate, while non-US (noticeably Europe) improved – a factor in our decision to be overweight Europe heading into “Liberation Day”.
Despite the moniker bestowed by the administration, the event should more likely be a signpost for investors to recalibrate expectations of asset vulnerabilities to undefined economic policies. Not to mention, recalibrating or reorienting to the fact that while April 2 may be a culmination of 10 weeks of frenetic news, it does not mean the uncertainty will stop or quickly mean revert.
The US Categorical Economic Policy Uncertainty Trade Policy Index is 1,604% above its long-term historical average. The only other time it spiked this high was back in 2018, during Trump’s first term and round of tit-for-tat-tariffs.
Point being, while April 2 may provide a brief period of clarity, it is unlikely to be the last trade-fueled policy quick-turn that the market’s GPS will have to adjust to. As a result, “Recalibration Day” might be a better way to characterize this day on the calendar.
Investors must start to recalibrate for lesser global cooperation and what it would mean if local countries become equally restrictive – that is, if US companies are no longer able to derive 40% of their profits from overseas. Investors must also brace for potential transitory inflation, as well as the reaction from central bank policy makers (and assets) to increased inflation in this new stop-and-start economic equilibrium – among other news and data points that will be fed into the GPS.