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A 90-day tariff reprieve

Market response

April 10, 2025 | 4 min read
Seema Shah
Chief Global Strategist

President Trump announced a 90-day reprieve on reciprocal tariffs, reducing them to 10% across all countries except for China, on which the U.S. raised reciprocal tariffs even further, from 104% to 125%. President Trump’s announcement emphasized that the decision to single out China was because they had retaliated against his reciprocal tariffs, whereas other countries had tried negotiating with the U.S.

Note that steel, aluminum, autos, and non-USMCA goods from Canada and Mexico are still subject to 25% tariffs. President Trump reiterated that he will still be announcing sectoral tariffs in due course.

What drove the President’s decision?

The decision to grant a temporary reprieve came after the S&P 500 had dropped 18.9% from its late February peak (almost entering bear market territory) and after the bond market started to show concerning signs of a “buyer’s strike,” driving bond yields higher across the curve.

This final point around the bond market likely struck a nerve with the Trump administration. They have repeatedly emphasized their focus on bond yields and even celebrated last week when Treasury bond yields dipped below 4%. Low financing costs appear to be a key pillar of the Trump administration’s overall agenda, so the reversal in market trends (surging Treasury yields) undoubtedly caused significant concern in the White House. Additionally, there were some unsubstantiated fears that stress was starting to build in the financial system, with a few comparisons even made to the Global Financial Crisis. These concerns prompted swift action to reduce the policy-driven risks.

Ultimately, Wednesday’s tariff pause highlights that President Trump cares deeply about the health of financial markets, and his pain threshold is most likely centered around the performance of the bond market. This knowledge should provide investors with some comfort as they try to map out a playbook for this crisis.

Market response shows the need to stay invested

Markets surged on the news, with the S&P 500 climbing almost 10% and the Nasdaq up 12% - their biggest single-day gains since 2008 and 2001, respectively. Credit spreads tightened, the VIX fell sharply from 58 to 34, and 30-year bond yields reversed their spike from earlier in the day. European and Asian markets are following the U.S. higher this morning. Still, despite the historic rally, the S&P 500 remains 4% below its level prior to the Liberation Day announcements.

For investors, the tariff pause announcement, and subsequent market reactions reiterates the importance of staying invested in these volatile times, particularly when politics lies at the heart of the market disruptions.

After the sharp market swings of the past few days and a rapid drop in valuations, risk assets were primed for a strong rebound. If investors had moved into cash to wait out the volatility, they would have missed out on the tremendous upward move. Staying invested and retaining disciplined investment behavior are essential during periods of stress.

Impact on growth outlook... seeds of doubt are germinating

Now for the bad news. There are already a few seeds of doubt creeping back into the market, and U.S. equity futures are trading lower today as investors start to digest the fact that President Trump’s decision to raise tariffs to 125% on Chinese goods broadly offsets the positive impact of lowering other countries’ reciprocal tariffs to 10%.

Recall that, ahead of yesterday’s announcement of a 90-day reprieve and a further increase in China’s tariff rate, the U.S.’s average effective tariff rate had increased from 2% at the end of 2024 to 28%. After the announcement, the effective average U.S. tariff rate only falls to around 23%—still the highest level in over a century. Indeed, the 125% tariff on China represents a 19% effective tariff increase by itself. The upshot of this is that the U.S. economy is still likely to be hit meaningfully by import tariffs, and tariff-driven inflationary surges are still on the cards.

It is possible that the negative impact may be dulled somewhat if China can re-route its exports via other Asian countries, which now face 10% tariffs. Certainly, the very acute asymmetry in tariffs likely does allow for workarounds and trade diversion.

In last week’s bulletin, we noted that without deregulation, tax cuts, or a walk-back from import tariffs, the U.S. economy appeared headed toward recession. While the latest announcement has somewhat reduced the odds of recession, the risk remains elevated. A more substantial decline in recession risk would likely require a meaningful walk-back of the extreme tariffs on China.

Outlook for investors… as of today

Peak tariffs and, therefore, peak pessimism, has likely been reached. Knowing President Trump is watching bond markets also implies that the tail risk of liquidity strains morphing into a financial crisis has been cut back significantly and provides a floor from which market sentiment can recover.

That said, caution remains warranted. The potential impact on the U.S. is still significant, and uncertainty is likely to remain elevated through the 90-day grace period and as the U.S./China back-and-forth persists. Some damage to confidence—especially international confidence in the U.S.—has been inflicted and may prove lasting.

In times like these, the adage of staying invested with a diversified portfolio is more important than ever. Global diversification remains essential, especially given the asymmetric implementation of tariffs across countries, while cross-asset class exposure provides valuable resilience in periods of heightened volatility. After a sharp decline, equities have the potential to recover in the months ahead, and fixed income can help cushion ongoing economic risks that are still confronting the U.S. economy.

Most importantly, investors should remember that market pullbacks are not unusual—on average, the U.S. stock market experiences an intra-year decline of 13.5%, yet most years still end with gains of around 9%. Volatility is a normal feature of investing, not a flaw—those who remain disciplined and invested through the noise are often rewarded over time.

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Disclosure

Investing involves risk, including possible loss of principal. Past performance is no guarantee of future results. Equity markets are subject to many factors, including economic conditions, government regulations, market sentiment, local and international political events, and environmental and technological issues that may impact return and volatility. Fixed‐income investment options are subject to interest rate risk, and their value will decline as interest rates rise. Asset allocation and diversification do not ensure a profit or protect against a loss.

Views and opinions expressed are accurate as of the date of this communication and are subject to change without notice. This material may contain ‘forward-looking’ information that is not purely historical in nature and may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.

The information in the article should not be construed as investment advice or a recommendation for the purchase or sale of any security. The general information it contains does not take account of any investor’s investment objectives, particular needs, or financial situation.

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