On 2 April, on what he himself dubbed “Liberation Day”, Trump unveiled a sweeping list of tariffs, bringing them to levels not seen since the 19th century. If Independence Day had Will Smith taking on aliens, this sequel features Trump against the world.
The main risk is that, since tariffs are effectively a tax on consumers, the situation could tip the economy into recession while also pushing inflation higher. This would leave the Fed with little room to cut interest rates. Assuming the tariffs are eventually eased, the key to avoiding a recession lies in how long the current uncertainty lasts—and how far the targeted countries go with their retaliatory measures. That said, the macroeconomic backdrop going into this was solid, and this time the inflationary shock does appear more likely to be transitory. All things considered, the damage may well be contained.
Until recently, markets largely believed tariffs were just a bargaining chip. While there is certainly some truth to that, a good portion of the tariffs are likely here to stay. One reason is that the government sees them as a key tool for shrinking the deficit and making room for lower taxes. Together with deregulation, deficit reduction and tax cuts are central to Trump’s agenda, and we believe they are both still very much in the pipeline.
Perhaps the sharp market corrections of recent days are, in part, the result of earlier over-exuberance. Uncertainty remains high, and the range of possible outcomes is broad. Volatility may well persist. We have grown a little too accustomed to risk assets rebounding quickly, no matter what. But with return dispersion now significant, there is no shortage of attractive opportunities to build solid returns over the medium term.
Date of report: April 7th 2025