Trade Wars and Recession Fears

Investors have been on edge since the presidential inauguration, worrying that a trade war could raise prices and slow the economy. As a result, the stock market has pulled back, with the S&P 500 and Nasdaq declining year-to-date.¹

Markets are grappling with prospective tariffs and their effects on trade. President Trump recently confirmed tariffs on Canada, Mexico and China, dashing hopes of more extensions or last-minute deals. Additional tariffs are expected in the coming months, including reciprocal ones against countries that impose duties on US goods.

Tariffs can be concerning because they represent taxes on imported goods that can be passed on to buyers. With inflation rates still elevated, tariffs could add further pressure to the prices of everyday goods. This is made worse if other countries retaliate with their own tariffs, sparking an escalating trade war. As the accompanying chart shows, the US runs a significant trade deficit with many major trading partners.

Given the market’s recent swings and constant news coverage, trade disputes can seem dire. But it's important to take a balanced view.

The administration has acted more swiftly with broad tariffs compared to President Trump’s first term, making the outcome harder to predict. During the presidential election the focus was pro-growth policies, whereas now trade wars and government downsizing have come into the forefront. Positive aspects remain, including strong corporate earnings, low credit spreads, historically low unemployment, and rising wages for workers.

It’s important to remember that tariffs are often used as a negotiating tactic for broader policy objectives. Policy announcements are often different than what ends up happening. Market reactions to tariff announcements in 2017-2019 were dramatic as well, but the ultimate economic impact was muted. Markets performed well during 2017 and 2019 despite short-term volatility. In 2018, the market fell as tariffs were implemented, but earnings growth was still strong and economic growth measured by GDP was almost 3%.

Only time will tell if tariffs reach rates not seen since the 1930s, or if agreements with major trading partners will be reached.

Diversification is working

The current market rumbles come after back-to-back years of over 20% returns for the US stock market, roughly twice the market's 100-year average annual return. Despite the current pullback, the S&P 500 has gained over 52% since the market bottom in late 2022² while the Nasdaq has risen 63%³ With markets reaching new all-time highs over the past few years, some investors may have grown accustomed to markets only moving in one direction.

While technology stocks have struggled recently (especially the "Magnificent 7" - see chart below), other sectors have performed well in 2025. This changing environment is a good example of why we build diversified portfolios comprised of multiple asset classes besides US stocks including bonds, international securities, and real assets. Bonds, for instance, have benefited as they often do in difficult market environments, helping to offset stock market declines in diversified portfolios.

In our experience well diversified portfolios help many clients navigate a wide range of markets. Categories that lagged in prior years often come to the rescue when current market darlings stumble, as seen in the chart below. While the S&P 500 is struggling YTD, international stocks measured by the MSCI EAFE index are doing well. We have long recommended a mix of US and international investments for most clients.

Are recession concerns valid?

Investors are weighing mixed economic signals amid renewed inflation concerns, government job cuts, and trade policies. The administration has acknowledged potential "turbulence" ahead, with tariffs creating uncertainty around the economic outlook.

Historically, recessions occur when the business cycle enters its later stages, or an external shock takes place, such as a pandemic or financial crisis. The current business cycle has shown signs of slowing, but has not yet contracted. A possible trade war represents a potential outside shock to consumers and businesses, but as discussed above it is far from certain to occur.

Inflation has rebounded with the Consumer Price Index climbing above 3.0% for the first time since last summer, while consumers now expect 3.5% inflation over the next five years—the highest level since 1995 according to University of Michigan data. This inflation outlook has contributed to widespread pessimism about future financial situations, creating a disconnect between consumer sentiment and market performance that investors must navigate carefully.

Despite overall healthy job growth in February, the 10,000 reduction in federal government jobs and expected further cuts have raised concerns about ripple effects throughout the economy (despite the fact that Federal workers represent less than 2% of the workforce). Price increases that challenge personal budgets can sometimes boost corporate profits and stock prices.

The S&P 500 experiences pullbacks on a regular basis

Periods of slower economic growth are a natural part of the business cycle. Forecasts are not always correct, and even when they are, markets seldom behave as expected. While the past is no guarantee of the future, the market declines and subsequent sharp recoveries in 2020 and 2022 are recent examples of situations where markets can quickly change their tune.

Similarly, short-term market pullbacks are a natural part of investing. As the accompanying chart shows, the S&P 500 experiences pullbacks on a regular basis, even as it has risen in the long run. It’s important to maintain a broader perspective amid heightened economic concerns.

Tariffs have increased uncertainty and some economic data has been mixed, but history shows that staying invested through challenging periods is the best way to achieve financial goals. If your goals haven't changed, it rarely makes sense to alter a well-designed portfolio based on short-term market swings.

There will be more trade headlines in the days ahead, but investing is not about a single day, week, or month. A well-constructed portfolio should help achieve financial goals over years and decades. Investors who stay invested through market cycles have historically captured the benefits of compound returns.

Portfolio updates

We are currently making updates to client investments as we do at regular intervals. These minor portfolio adjustments are designed to enhance inflation protection on the fixed income side of the portfolio, and assure overall equity allocations remain balanced across sectors. We want clients to benefit from stocks exposed to technological growth without being overconcentrated. If we continue to see a rotation away from US tech dominance, we expect our portfolios to similarly benefit.

^{1 Standard & Poor’s and Nasdaq have declined 5.2% and 11.2%, respectively, as of March 13, 2025
2 S&P 500 price return from September 20, 2022 to March 13, 2025
3 Nasdaq Composite price return from December 22, 2022 to March 13, 2025}