Trade Turbulence: How Tariffs Are Shaking the Market

While U.S. stocks are down just 2% year-to-date¹, they’re down approximately 7% over the last couple of weeks, as volatility has surged to near two-year highs. The market has become skittish, responding sharply to any tariff-related news. It’s not just investors who are anxious. Consumer and business sentiment has also soured as tariff concerns have grown.

These worries are not unfounded. Widespread, sustained tariffs (and other countries’ retaliation) would likely have significant negative consequences for the economy and markets, namely higher inflation and slower growth. However, as various tariff delays and exemptions have been announced, it’s unclear to what extent tariffs will be implemented and how long it will take to reach a resolution with U.S. trade partners.

With U.S. equity valuations already high, markets may have further room to decline as investors assess the potential impact of a trade war. A severe market downturn, however, would likely require actual cracks to form in the economy.

Some pundits have pointed to the Atlanta Federal Reserve Bank’s first-quarter GDP forecast of -2.4% as evidence of economic weakness. However, the forecast is driven almost entirely by January’s 34% surge in the trade deficit. If you exclude international trade—for reasons explained below—the GDP forecast would be +1.4%², consistent with a growth slowdown but far from a contraction. The reason we would deemphasize the trade deficit is because it was driven by a spike in the import of goods (mostly to front-run tariffs), which isn’t a sign of a weakening domestic economy and is likely to reverse in the months ahead.

There is also concern that the Department of Government Efficiency’s (DOGE) aggressive cost-cutting could weigh on growth. While possible, so far, there’s been no material reduction in federal spending or employment, and there are many lawsuits seeking to stall or overturn actions taken by DOGE, which will take time to resolve.

What about the sharp decline in consumer spending in January? We do not find this concerning for several reasons:

Spending in November and December was unsustainably strong.
A sharp drop in vehicle sales, which tend to be highly volatile, contributed to the decline in spending.
Adverse weather, like the L.A. fires and severe winter storms in the South, likely had an impact.

As we navigate this tumultuous period, it’s important to observe the broader landscape and trends rather than extrapolate a recent data point. It’s also important to maintain a diversified portfolio, which has been rewarded so far this year. Within that context, we’ll continue to monitor the implementation of tariffs, DOGE’s actions, and market fluctuations to adjust clients’ investment strategies as needed.

If you would like to learn more about our investment philosophy or offerings or have specific questions about your portfolio, please contact your Blue Trust financial advisor. If you do not have a Blue Trust advisor and are interested in speaking with one, please reach out to info@bluetrust.com or call 800.841.0362.