Ok, tariffs happened. But now what is the big question—for policy, the economy, and obviously, markets? Here are Carson Investment Research’s answers to 10 key questions.
One: What tariffs went into effect?
At 12:01am on March 4th, new tariffs on Canada, Mexico, and China went into effect. These included:
- 25% tariffs on all Canadian goods, with the exception of Canadian energy imports (which will be tariffed at 10%)
- 25% tariffs on all Mexican goods
- 10% tariffs on all Chinese goods, which will be in addition to the 10% tariffs that went into effect a month ago
The tariff orders exempt “de minimis” goods (goods/packages with a value below $800), since the US doesn’t have systems in place to process these. This exception didn’t originally apply to the initial 10% round of tariffs on Chinese goods, but US customs and USPS struggled to implement these on small packages, and the exemption was restored. Note that this is one way a lot of Chinese goods making their way into the US have avoided tariffs (since 2018).
These tariffs are a big deal – Canada, Mexico, and China make up about 43% of US goods imports and 41% of US exports.
The tariffs on China alone are twice as large as those imposed during President Trump’s first term. The new tariffs will raise the average effective tariff rate that the US imposes on imports from about 2% to near 10%, which is something we haven’t seen since the 1930s and ‘40s. The US is once again putting a self-imposed economic blockade around itself.
Two: Are there more tariffs to come, and will other countries retaliate?
Short answer: yes (to both questions). President Trump has plenty more planned. These include national security-based tariffs on steel, aluminum, and even lumber and agricultural imports (the US imports $200 billion in food products). Plus, reciprocal tariffs on every country, which would match the tariff rate other countries impose on US goods. It’s going to take a while before several of these come through. For example, the reciprocal tariffs are going to be very hard to navigate and implement for US agencies (think of how many trade partners the US has, and all of them may impose different rates for different goods).
Retaliatory actions are already in the works. Canada imposed 25% tariffs on $20.5 billion in US goods but haven’t specified the products yet. They plan to extend that list to $85 billion of goods over the next few weeks. Mexico is set to respond by this weekend. China was a lot quicker out of the gate, announcing retaliatory tariffs minutes after Trump’s latest tariffs were imposed. Amongst other measures, they’re imposing broad tariffs on food imported from the US, which is targeted to hit the export-oriented US agricultural industry. US farmers will likely face the brunt of a long drawn-out trade war. Back in 2018, the Trump administration gave out subsidies to blunt the impact, but it may not be as easy this time around with the deficit already running high.
Here’s a useful chart from Bloomberg showing the list of tariffs and potential retaliatory actions.
Three: Weren’t Tariff Threats Supposed to be a “negotiating ploy”?
That was the expectation, but we have tariffs now. The White House has said that Canada, Mexico, and China need to do a lot more to stop the flow of illicit drugs into the US. Canada and Mexico promised to act, and that was why the tariffs were postponed by a month. But Trump clearly believes their efforts are lagging and didn’t want to wait longer (or perhaps risk being seen as crying wolf). At the same time, it’s not clear what exact quantifiable metrics these countries need to meet. Trump’s also unhappy about trade imbalances—a long-held belief of his is that these countries are taking advantage of Americans by selling us a lot of goods.
All this may get resolved in eventual negotiations, though correcting for trade imbalances is going to be tricky. For example, once you exclude oil, the US actually exports more goods to Canada than it imports. Note that the US is the largest energy producer in the world, but it needs Canadian “heavy crude oil” for its refineries (different from the mostly “light, sweet, crude” produced in the US). It’s hard to see how Canada will rebalance its trade with the US. China is also unlikely to take concrete measures to reduce its reliance on manufacturing and exports. In fact, imposing tariffs on Mexico but not Southeast Asian countries works to China’s benefit, as a lot of Chinese companies route exports through Southeast Asia.
Anyway, for now, it’s all action and not much talk. The trade war is here, and it may last a while. Even if we get a roll back of tariffs, the threat is going to loom over the global economy.
Four: Will prices go up due to tariffs?
All else equal, yes, prices will go up. But it’s going to vary a lot depending on several factors, including retaliatory tariffs and currency movements. The White House expects the dollar to appreciate, alleviating some of the pressure of higher prices. However, a stronger dollar is a double-edged sword as we wrote in our 2025 Outlook. Yes, it makes imports cheaper (perhaps offsetting some impact of higher tariffs) but it also makes US exports more expensive (on top of facing retaliatory tariffs), and that hurts US producers. The dollar index rose about 10% from the end of last September through mid-January. But the dollar has pulled back by about 4% since then and is close to where it was on election day, negating the expectation that the price impact of new tariffs will be mitigated by an appreciating dollar.
The impact on prices is also going to vary depending on the type of product. The Budget Lab at Yale University estimates larger price increases on items like computers and electronics (+10.6%), apparel (+7.5%), autos (+6.1%), fresh produce like fruits and vegetables (+2.9%), and wood products (+2.9%). This accounts for higher import prices as well as substitution effects (if Americans switch to higher-priced goods made in the US).
Companies may also choose to eat higher input costs instead of passing them onto the end consumer, though this will imply shrinking margins. This is what happened in 2018–2019, but during the recent bout of high inflation (in 2021–2022), companies passed down costs and margins even expanded. So, we may be in a regime where companies believe they can actually pass down costs to consumers without impacting demand for their goods (or their margins).
Note that a one-time price increase does not imply inflation will rise. Higher inflation would mean that prices continue rising month after month, and unless tariffs continuously ratchet higher, we’re unlikely to see that. This is not to say that even a one-time price increase will not hurt consumers and businesses. Think of it like a one-time increase in the sales tax.
Five: Will the Federal Reserve cut interest rates to alleviate any pain from tariffs?
Unlikely. The Federal Reserve (Fed) has currently paused on further rate cuts, and tariff uncertainty is likely to keep them on pause for longer. Fed Chair Powell has repeatedly highlighted the uncertainty around tariff policy as one of the reasons behind the pause. They’re going to want to see what tariffs are being implemented, the goods on which they’re imposed, the duration of tariffs, and ultimately model out the impact (or even see it in the data).
At the same time, the Fed did cut rates back in 2019 when they thought elevated rates were hurting economic growth. Rates are clearly elevated now—even Powell has acknowledged that they are “meaningfully restrictive”—and that’s hurting cyclical areas of the economy like housing. The latest manufacturing data from the Institute for Supply Management (ISM) indicates that raw materials prices are rising and companies are worried about volatility and uncertainty due to tariffs.
All this means that the Fed could act sooner if the economy is seen to be faltering, with the unemployment rate starting to rise well above its current rate of 4.0. We still expect the Fed to cut two–three times in 2025, but likely in the second half if there’s no deterioration in the labor market and disinflation continues. Markets are currently pricing in a Fed funds rate of 3.66% by the end of 2025, implying close to three rate cuts before year end, though the first one is not expected before June. A month ago, markets were pricing in just one cut—there’s been a big shift since then as economic data has come in on the weaker side. Meanwhile, Fed members are expecting to cut rates twice in 2025.
As we’ve pointed out for some time now, inflation is no longer a problem, and elevated rates are hitting key parts of the economy. So, the Fed should probably cut rates sooner rather than later, instead of waiting for worse data. Fed rate cuts prompted by bad news, like a higher unemployment rate, is not what you want to be hoping for. We tend to believe that bad news is bad news, and once the unemployment rate starts to go up, it’s likely to continue going up. There’s no such thing as a “mild recession” or a “little disturbance.” It’s folly to hope for one, believing you can turn it around when it happens.
Six: Will we see stagflation as a result of tariffs?
A colleague pointed out that Google Trends has shown a jump in searches for the word “stagflation.” Stagflation is an economic environment when you have 1) high unemployment and 2) high inflation. We have neither right now. The likelihood of stagflation is really low.
The unemployment rate is currently at 4%, near historical lows. Labor market indicators suggest that layoffs remain low, despite announced cuts in federal government jobs.
With respect to inflation, tariffs will likely increase prices in a one-time shift, but sustained inflation is unlikely. For sustained inflation, one of the first places you want to look at is oil prices. The last time we had stagflation was in the 1970s, and the inflation spikes of 1973–1974 and 1979–1980 were both accompanied by energy shocks. Even more recently in 2022, the big surge in inflation came amid higher energy prices that shot up after Russia’s invasion of Ukraine in February 2022. Right now, oil prices are trending in the opposite direction, especially on the back of recent news that OPEC (+Russia) is going to step up production. WTI crude prices are near the bottom end of the range we’ve seen over the last two and half years.
Markets aren’t expecting stagflation either. If they were, we would see expected Fed policy rates move higher, as the Fed looked to combat higher inflation. Instead, they’ve been moving lower amid expectations of weaker than expected growth (as I wrote under question #5).
Seven: Will there be a (deflationary) recession?
A more pertinent question rather than whether we’ll have stagflation. Right now, we don’t believe we’ll see a deflationary recession, i.e., one where the unemployment rate spikes and consumption slows down a lot (leading to lower prices).
Consumption did slow in January, a lot. But this is likely due to the fires in California and unseasonably cold weather across the South. We expect a rebound in February and March. In fact, we saw February auto sales rise 1.8% to 16 million vehicles (seasonally adjusted annualized rate), higher than at any point between June 2021 and September 2024.
Income growth is still running strong and remains faster than inflation. Over the last three months, employee compensation (across all workers in the economy) rose at an annualized pace of 5.7%, even as headline inflation (as measured by the Fed’s preferred Personal Consumption Expenditures inflation metric) rose 2.9%. Disposable income was up even more, rising 6.7%, though that was due to the one-off effect of Social Security benefits being adjusted higher by 2.8% for inflation.
In short, inflation-adjusted incomes continue to rise, and that should support consumption. Of course, as I noted above, cyclical areas of the economy are struggling, and that could be the difference between 2.5 – 3% GDP growth and 1.5 – 2% GDP growth.
Ultimately, the labor market is key because that is where income growth comes from (including employment gains, wage growth, and hours worked). Right now, it’s in a fairly healthy place, even though hiring has slowed a lot. It’s a good labor market if you already have a job, but a tough one if you’re out of work and looking for a job. The good news is that the Fed’s bias is towards cutting rates rather than increasing them (despite tariffs). They look ready to step in to protect the labor market if there’s any deterioration, and that’s a big positive.
Eight: Will markets crash?
We believe the bull market is still young and has a ways left to go. However, we could see significant volatility—something we expected when we wrote our 2025 Outlook over three months ago. The S&P 500 is down 6.0% from the February 19 peak, which has many investors quite worried, but volatility is the toll we pay to invest. That’s right, even some of the best years on record have seen some scary moments, making 2025 not all that different from any year in history.
Focusing specifically on the past two years, stocks gained more than 20% both times, but it wasn’t easy. Remember March 2023 and the Regional Bank crisis? The S&P 500 had a 7.8% mild correction then and then a 10% correction into late October, yet still managed to rally and gain more than 20%. Then last year we again saw mild corrections two separate times, with the big one being the 8.5% mild correction in August 2024 during the yen carry trade unwind drama. Yet again, stocks gained more than 20% for the year.
Looking into the data more, the average year historically has seen more than seven different 3% dips, more than three separate 5% mild corrections, and a 10% correction once a year. Going out more shows a bear market happens about once every three-and-a-half years. The bottom line is the headlines might be scary and uncertainty is rampant, but every year sees scary headlines and volatility, which should help put the tariff worries in perspective.
As long as we avoid a recession that hits the profit outlook, we should be able to avoid a sustained bear market. And our base case is still no recession.
Nine: Can markets turn around after early-year weakness?
We have seen weakness to start this year, and the S&P 500 has given up all its gains since election day (from November 5 through March 4, 2025). The story has been worse for the most cyclical parts of the market, like small cap stocks. The S&P 500 Index is up just 0.4% since election day, while the small cap Russell 2000 index is down 7.6%.
Although this weak start to 2025 hasn’t been fun, it isn’t really a big surprise. Post election years tend to be quite weak early, with a negative year-to-date return as of early March typical. Sound familiar? Not to mention, we found that the first few months after a year with a 20% gain were historically choppy and weak as well. The good news is after these early-year slumps we’ve seen the rest of the year improve and we expect that to happen once again.
Ten: Has our Outlook changed?
Perhaps the most important question. We titled our 2025 Outlook “Animal Spirits.” As we wrote there, we chose the title more for the potential for a rise in animal spirits than the conviction it would happen. With all the data that’s come in over the last two months, along with the fact that significant tariffs have now been implemented (at levels unprecedented since the end of WWII), the possibility of a rise in animal spirits is likely hanging by a thread. We did expect tariffs to be a significant threat, along with a stronger dollar. But there were opportunities too, including potential rate cuts by the Fed and favorable tax policy from Congress. The problem is that the sequencing has gone the wrong way—the threats are manifesting already even as potential opportunities get pushed out to the back half of the year.
The short answer to the question about our outlook is no, it hasn’t changed in a broad sense. We don’t expect a recession, and we still expect stocks to gain in 2025. But these things are not binary, and there are a range of possible outcomes. Risks have increased, and we’re in the business of managing risk within the portfolios we manage. The policy outlook is murky, with the Fed on pause at least until the summer and the threat of tariffs holding back animal spirits for now. Congress is yet to really get moving on tax policy legislation, but early indications suggest that some preferred policies, like no taxes on tips, no taxes on social security income, and a lower corporate tax rate, may not come to pass.
Ultimately, what matters is how our views, and any changes, translate to portfolio actions. So here are some actions we’ve taken over the last month within our tactical portfolios:
- Maintained our equity overweight (given our still positive outlook), but reduced the size of the overweight for the first time in over two years
- Reduced exposure to areas of the market that tend to exhibit more volatility, including small-cap and mid-cap stocks
- Increased exposure to more defensive, low volatility stocks in the US, barbelled with allocations to stocks exhibiting momentum (including financials)
- Increased allocations to both Treasuries, particularly inflation-protected securities, as well as ultra-short term securities
- Maintained the allocation to managed futures to hedge against unexpected inflation shocks and gold (which we’ve held for close to two years now as a crisis hedge)
Our longer-term outlook hasn’t changed, and we haven’t made significant changes in our strategic portfolios. Big picture, we’re still overweight equities and underweight bonds.
We continue to monitor the macroeconomic data closely and evaluate both opportunities and threats on the policy side as well. If the facts change, we’ll update our views (and portfolios).
Securities offered through Cetera Advisor Networks LLC, Member FINRA/SIPC. Investment advisory services offered through CWM, LLC, an SEC Registered Investment Advisor. Cetera Advisor Networks LLC is under separate ownership from any other named entity. The opinions stated in this article should not be construed as direct or indirect advice, or as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results. This piece contains statements related to our future business and financial performance and future events or developments involving Carson that may constitute forward-looking statements. These statements may be identified by words such as “expect,” “look forward to,” “anticipate”, “intend,” “plan,” “believe,” “seek,” “estimate,” “will,” “project” or words of similar meaning. Such statements are based on the current expectations and certain assumptions of Carson Group’s management, of which many are beyond Carson Group’s control. These are subject to a number of risks, uncertainties and factors which if one or more of these risks or uncertainties materialize, or should underlying expectations not occur or assumptions prove incorrect, actual results, performance or achievements of Carson Group may (negatively or positively) vary materially from those described explicitly or implicitly in the relevant forward-looking statement. Carson Group or any affiliates Carson Group neither intends, nor assumes any obligation, to update or revise these forward looking statements in light of developments which differ from those anticipated.
This is not intended to provide specific legal, tax, or other professional advice. For a comprehensive review of your personal situation, always consult with a tax or legal advisor. The return and principal value of stocks fluctuate with changes in market conditions. Shares when sold may be worth more or less than their original cost. Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns.
A diversified portfolio does not ensure a profit or protect against loss in a declining market.
Investors cannot invest directly in indices. The performance of any index is not indicative of the performance of any investment and does not consider the effects of inflation and the fees and expenses associated with investing. The return and principal value of bonds fluctuate with changes in market conditions. If bonds are not held to maturity, they may be worth more or less than their original value.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual This content cannot be copied without express written consent of CWM, LLC.
Additional risks are associated with international investing, such as currency fluctuations, political and economic stability, and differences in accounting standards.
The S&P 500 is an index of 500 stocks chosen for market size, liquidity and industry grouping (among other factors) designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe.
The Bloomberg U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds.
