The Trump administration’s highly anticipated “Liberation Day” delivered a much more aggressive trade stance than even the most pessimistic commentator expected. The overall effective tariff rate of roughly 22% is almost double the top end of market expectations going into last night’s announcement in the Rose Garden.
There has been some surprise in the market on the somewhat crude way in which tariffs for those countries running a trade surplus with the US is calculated. The US Trade Representative takes a country’s trade surplus with the US, divides it by the amount of trade it conducts with the US and then halves it. For example, China has a trade surplus with the US of $295bn on total exports of $438bn, which is a ratio of 68%, yielding a tariff rate of 34% (in addition to the existing tariff rate of 20%). Elsewhere, where a country runs a trade surplus with the US it will still be subject to a 10% tariff.
Whilst there is every possibility that Trump may once again soften some aspects of his tariff policy, it is likely that there will be a further dent to business and household confidence around the globe, with the US, in the short term at least, suffering the most. Whilst to some observers the way Trump has gone about his first two and a half months in office seems like a monumental act of self- harm, we see some method behind his actions thus far.
If we combine Trump’s trade policy with the activities of Elon Musk’s cost cutting Department of Government Efficiency (DOGE), we could make a case for saying that the US administration is trying to ‘kitchen sink’ by delivering painful supply side reforms to the US economy all at once – and well ahead of the end 2026 midterm elections, where Trump’s control of Congress is likely to come under threat. With the US economy now likely to weaken in the months ahead, the US Federal Reserve, which has been reluctant to signal much in terms of further rate cuts, will, we feel, be drawn into a much more rapid monetary policy easing cycle. This should have the effect of lowering US Government borrowing costs and provide a less challenging environment in which to deliver the promised tax cuts later this year.
What does all this mean for financial markets? In the near term it is reasonable to expect market volatility to remain elevated and market participants to favour safe havens such as gold and government bonds. Elsewhere we would expect to see a rotation out of cyclically exposed equities into defensive sectors such as health, consumer staples and utilities. Whilst the high concentration of market returns in US mega cap stocks over the last two years has created a highly challenging environment for many active investors, we feel that we will see a continuation of this year’s trend of returns broadening out by region and sector which should suit our stock picking approach, further helped by a weakening US Dollar.
Looking towards the year end and beyond, we think it is reasonable to expect the Trump administration to focus on the delivery of the more growth positive aspects of his agenda (tax cuts and deregulation).This, along with the European commitment to boost defence and infrastructure spending, should provide a reflationary boost to equity markets later this year, which the Trump administration hopes will lead them to carry the day in the 2026 midterm elections.
The value of securities and the income from them can fall as well as rise. Past performance should not be seen as an indicator of future returns. All views expressed are those of the author and should not be considered a recommendation or solicitation to buy or sell any products or securities.
