March 2025: TARIFFS, TUMULT, AND A SHIFT IN SENTIMENT

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Stock Market: A Correction
Takes Hold

A market correction took hold in March with equity indices falling across the board. The S&P 500 dropped -5.75%, the Nasdaq 100 -7.69%, and the Russell 2000 -6.99%. Foreign markets fared better, with the EuroStoxx 50 down -3.94% and the MSCI EAFE down -2.77%.

Investors were rattled by the Trump Administration’s ambitious effort to reset trade policy, including threats to raise trade levies to levels unseen since 1910. Economist Joey Politano estimates the effective US tariff rate is now 25%, roughly 10 times higher than before Trump took office.

Source: Apricitas Economics as of April 12, 2025

BROAD-BASED CONCERNS

Market participants and business leaders expressed concern not just over the scale of the tariffs, but also their execution:

• The punitive approach taken prior to the start of any negotiations
• Its indiscriminate application to ally and adversary nations alike
• The potential for reciprocal tariffs
• Potential impact on global growth and overall market stability
• Remote possibility of a global trade war similar to what took place in the 1930s under the Smoot-Hawley Act leading to the Great Depression

The Administration’s limited clarity has amplified volatility. Conflicting messages and poorly explained policy mechanisms have fueled confusion, leaving both Wall Street and Main Street on edge. Businesses are increasingly pausing investment decisions, waiting for more direction.

SHOCK AND PAUSE DIPLOMACY

The Administration’s strategy appears to be one of “shock and awe,” paired with urgent calls for trade negotiations. A recently announced 90-day pause in new tariffs offers a window to establish a framework with affected trade partners. However, expectations were muted. Overhauling global trade structures built over decades is a long-term process, one unlikely to align with the White House’s accelerated timeline.

This mismatch has forced global investors to reassess US exposure, contributing to the recent selloff and a potential rebalancing of long-held portfolio weightings.

FIXED INCOME: VOLATILITY RETURNS

The bond market offered mixed results in March. Short-term Treasuries posted modest gains, the 10-year was relatively flat, and the 30-year fell -1.38%. Bloomberg US Mortgage-Backed Securities Index was mostly unchanged, while US Corporate Investment-Grade Bond Index slipped -0.29% and US Corporate High Yield Index declined -1.02%.

TREASURIES AND THE GLOBAL WEB OF RISK

Bond markets saw a meaningful uptick in volatility toward the end of the month as investors attempted to digest multiple potential outcomes from a tariff policy that may mark the end of the post-WW II international economic order.

Given global interest rates key off the US Treasuries, major disruption in the latter has an outsized impact on economic activity around the world. In addition, Treasuries serve as the principal collateral securing a daisy chain of highly levered transactions totaling in the trillions of dollars. When that collateral value is impaired due to a large and unexpected jump in yields, the unwinding of such trades can result in huge losses that flow through the entire financial system, threatening to bring it to a halt. If businesses are unable to refinance loans at reasonable and planned for cost, the end result can be outright defaults, threatening the onset of a severe recession.

UNCERTAINTY BREEDS SELLING

Much of this risk is hidden. Uncertainty in markets is magnified by the fact most market participants lack the ability to see how other participants are positioned, compounded by the fact many of those participants are highly levered. When fear spreads, the impulse is to sell first. Risk managers, facing opaque exposures, often preemptively liquidate positions or call-in margin. It’s not difficult to see how these incentives can result in a negative price spiral (selling begetting more selling) – which is what financial authorities should want to avoid at all cost.

This environment is further destabilized by geopolitics:

• Treasury holders abroad may act in ways misaligned with US interests
• Some nations may sell Treasuries to pressure Washington
• Higher tariffs risk higher inflation, adding upward pressure on yields

The dollar’s recent decline is one symptom of lost global confidence. A weaker dollar boosts import prices, feeding inflation and complicating the Fed’s job.

MONETARY POLICY: A DELICATE BALANCING

Fed Chair Jerome Powell has remained steady, reiterating that monetary policy will be guided by data. While President Trump has called for rate cuts, Powell has resisted, pointing to strong economic data and warning of the inflationary effects of tariffs.

But the economy is clearly in transition. Consumer sentiment, according to the University of Michigan, has dropped to the second-lowest level on record. Inflation expectations have surged to multi-decade highs. Even among Independents and Republicans, confidence has waned. Business confidence is down sharply as executives delay capital expenditures until policy clarity improves.

Source: Callahan Associates as of March 2025

While all this suggests the Fed will look to ease monetary policy soon rather than later, they are constrained by the fact a recession would increase the size of the fiscal deficit, placing upward pressure on both inflation and interest rates once the economy recovers.

CONCLUSION: CAUTION AHEAD

March marked a turning point. Markets are adjusting to a new regime of policy unpredictability, higher inflation risk, and geopolitical tension. Tariff headlines and Fed independence are now central concerns for investors.

For now, the prudent approach is to stay defensive. Risk premiums are rising, volatility is back, and clarity from Washington remains elusive. Patience and vigilance will be essential in the months ahead.

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