Sweeping Import Tariffs Implemented – Beginning April 5, a 10% universal tariff will apply to all imported goods, with an additional tariff for countries running a trade deficit with the U.S. starting April 7. This move signals a broad protectionist shift in U.S. trade policy

Existing Tariffs Remain Intact – The new tariffs do not replace prior trade restrictions, such as the 2018 China tariffs, compounding the overall cost of imports for businesses and consumers.

Key Exemptions for North America & Select Sectors – Canada, Mexico, and certain industries (e.g., pharmaceuticals, autos) are exempt.

Historic Economic Impact – If fully implemented, these tariffs would increase the U.S. effective tariff rate from 2% to 20%, generating ~$640 billion in revenue, comparable to doubling corporate tax revenue. If we called a tariff a tax, this would represent the largest tax increase in modern U.S. history.

Recession Risk Has Increased Significantly – If the tariffs remain, the economy may face a manufactured downturn similar to the COVID-19 lockdown-induced recession in which we “did it to ourselves”. The Administration’s aggressive restructuring of trade flows could disrupt economic activity, amplifying recession risks.

Near-term Inflationary – Tariffs directly increase costs, particularly in consumer electronics (China, Vietnam, Malaysia), apparel & footwear (Vietnam, Cambodia), and autos (Canada, Mexico). Given the scale of the tariffs and their weight in CPI, inflation levels could spike 1%–3% in the near term.

HOWEVER, PRICES FOLLOW DEMAND – While tariffs push prices higher in the short-term, demand ultimately dictates inflation. If consumers pull back spending due to rising costs, lower confidence or higher unemployment, inflationary pressures would likely ease, making the price surge transitory.

Restrictive Policies Add to Headwinds – Both fiscal and monetary policy remain tight, as we discuss in for our March Review with the government cutting spending while raising “revenues” via tariffs. Additionally with near-term inflation concerns still present, the Fed is likely to maintain its restrictive stance, potentially prolonging economic strain. This is the leading risk at the moment.

Heightened Volatility – As we noted in our annual outlook, elevated valuations and market concentration are already increasing downside risks, and the tariff shock adds another layer of uncertainty, fueling market swings.
Earnings Expectations Under Pressure – While earnings estimates have been gradually revised down, 3Q and 4Q forecasts remain intact. As earnings optimism fades, equity prices may adjust lower to reflect weaker profit expectations.
Flight to Safety Continues – Investors are rotating into defensive sectors (staples, energy, utilities), shifting geographically toward Europe, and increasing exposure to bonds and cash, seeking protection from volatility.

Value Over Growth Sector Rotation – Growth-heavy sectors like tech (46%), consumer discretionary (15%), and communication (13%) which include Alphabet and Meta are under pressure, while value-oriented sectors such as financials (23%), healthcare (14%), and industrials (14%) have provided relative stability. Percentage are Russell 1000 Growth vs Russell 1000 Values.

Short-Term Rates Rally, Long-Term Uncertain – Short-term rates are rallying as investors move to cash. Frankly this reflects market timing rather than a strategic allocation. Long-term bond yields will depend on growth and inflation trends, making them highly volatile and any positioning there will be a big bet one way or the other.
Intermediate-term bonds present an attractive risk-reward balance.
Credit Risk Skews Negative – We are underweight high-yield with tight spreads and underlying risks underestimated in our view. Maintaining an underweight position in credit remains prudent in our view given deteriorating fundamental as risk is to the downside.

Well-Positioned for Volatility – Our balanced approach entering the year has helped navigate market turbulence.
- Fixed Income: Managed the inflation vs. economic risk trade-off by adding TIPS, cutting global bonds, and increasing unconstrained strategies, while maintaining low credit exposure.
- Equities: Underweight U.S. positioning has added value, with active management delivering strong results despite small cap headwinds
- Real Assets: Outperformance vs. U.S. equities, with REIT reduction in favor of broader real assets benefiting allocations.
Key Themes Playing Out Early – We’re one quarter of the way through the year so far too early to count chickens. That said, Fragility, durability, ‘Age of Alpha’ are proving timely. The “Mag 7” have turned into the “Lag 7”, resilient portfolios need self-evident and active risk management broadly performing well and our managers in particular holding up.
Our Opinions Will Change as the Facts Change – Portfolio allocations remain unchanged, but we are actively monitoring risks and opportunities. If warranted, we will react. In all likelihood, that action would be toward the bull side if markets materially decline from here rather than trying to “bet” on how the next leg of a potential drawdown may occur.

Market Perspective: Liberation Day

March 2025 Market Update