Quarterly Insights: April 2025
On April 2nd, President Trump’s announcement of new tariffs triggered a global equity sell-off. In their current form, they will affect nearly all U.S. trade.
The speed and scale of these trade actions have been stunning. Using the President’s first term as a point of reference, tariffs were levied about 14 months into the term, and only after a thorough investigation into Chinese trade practices. Further, they remained focused on only one country. The new tariffs under the President’s second term affect about $2.5 trillion in U.S. imports and touch nearly every trade partner, pushing the trade-weighted average tariff rate from 2% to over 20%, a level unseen in over a century. Like many think tanks and journalists spanning the ideological gamut, we have trouble following the administration’s math for what they call “reciprocal tariffs.” But one thing is clear: if these levies persist, they will upset global supply chains that have been decades in the making.
It’s tempting to try to predict what will happen from here, but it’s impossible to do so with any real degree of confidence. One would need to accurately forecast human responses – with potential reactions from our trade partners ranging from submissive to retaliatory – as well as the first, second, and third order effects on businesses. The administration could scale back these tariffs (you can be sure that industry groups, major donors, and world leaders have been working the phones) or leave them in place in an uncomfortable game of chicken.
Even lacking meaningful foresight, the odds of recession have likely increased. As we recently wrote in our April 4th email to you titled “Tariffs and the Market Sell-off,” recessions can be self-fulfilling. That is, fears of the unknown can hurt consumer spending and business investment, which can then snowball through a negative feedback loop to further hurt confidence. But we need not panic if a recession materializes. While unpleasant, recessions are a natural part of the economic cycle. Through the strength of our institutions, they allow us to refocus our capital and workforce towards new endeavors. For perspective, consider that many of the most dominant companies forged their success during crises. The oil price shocks of the 1970s spurred the growth of Price Club (now known as Costco) as the founder saw a way to deliver value to struggling businesses and households through the warehousing model. The Great Financial Crisis catalyzed demand for flexible, low-cost lodging, disrupting the hotel industry by connecting property owners with guests through Airbnb’s peer-to-peer platform. And the 2020 pandemic forced businesses to adapt via digital tools (reflected in multi-year improvements in our country’s labor productivity) and helped them eventually find new avenues for growth.
This isn’t to suggest that tariffs will spark the next wave of prosperity. Economists universally regard tariffs as harmful. Yet economies like ours have anti-fragile properties in ways that are not obvious in the middle of a storm. That is, our institutions and businesses build resilience through adversity, akin to how muscle fibers grow stronger under duress. Clifford Swan has long had success identifying companies that widen their leadership during periods of calamity, whether through strong capital positions (allowing for investment in growth while their competition struggles to tread water) or by delivering unimpeded service to customers in ways that fortify their long-term business relationships and brand image. While acknowledging our lack of ability to see through the fog of the tariff news, we’ve wasted no time scouring the market for these very opportunities – companies that are now priced below their long-term value, underpinned by durable advantages and an attractive runway of growth.
Counterintuitively, the riskiest moment for investors isn’t in the middle of a sell-off when investor anxiety has hit a fever pitch. Risk is highest in moments of complacency when the market is at all-time highs and very little bad news is priced into stocks. We encourage you to view today’s challenging market conditions through a long lens and to remember that your portfolio was built to weather choppy waters.
We’ll keep you informed through these letters and our ongoing conversations. And as always, we would be glad to review your investment strategies and financial plans, or simply provide reassurance, during what has understandably been an unsettling time.
The above information is for educational purposes and should not be considered a recommendation or investment advice. Investing in securities can result in loss of capital. Past performance is no guarantee of future performance.
