Cutting through the “noise” during times of high market volatility can be challenging but this piece attempts to do so by offering our perspective concerning recent market events, some historical context, and a few forward thoughts. Appleton’s Wealth Managers are available to discuss your personal circumstances, so please reach out.
Global Trade Relations Rocked by Tariff Announcements
While it was widely expected that the second Trump Administration would take a hawkish stance on trade policy, expectations of modest tariffs increases used primarily as negotiating tools appear to have been overly optimistic. Using a controversial interpretation of emergency economic powers, April 2nd’s announcement of a universal 10% tariff coupled with individual “reciprocal tariffs” stunned markets, leading to a rapid and pronounced stock market slide.
Fed Chairman Powell emphasized on April 4th that the proposed tariffs were “significantly larger than expected” and will probably lead to “at least a temporary rise in inflation.” According to Strategas, the announced tariffs amount to 2.2% of GDP and are effectively twice the size of the largest tax increase in modern US history.
Isaac Newton long ago stressed that “for every action, there is an equal and opposite reaction.” While his findings led to breakthroughs in physics, not economics, there is a good deal of market applicability. An onerous 34% rate assessed on Chinese imports was quickly matched by China, a move some believe was designed to pressure US markets and policymakers. As we write, there are reports of possible further increases in Chinese goods if their retaliation is not rescinded, suggestions that the EU will soon vote on retaliatory measures, and suffice it to say, other countries are considering their own responses. Forcing trade partners to the table may be an Administration objective, but it creates a great deal of uncertainty that markets have difficulty pricing.
Initial Economic and Market Reaction
The last few days have produced a painful “risk-off” reaction with the S&P 500 posting -4.8% and -6.0% days to close last week’s trading, shedding $6.6 trillion in value. This was the sharpest 2-day fall since the onset of COVID in March 2020, and further declines have been incurred so far during April 7th trading.
As might be expected, a flight-to-quality has driven high-grade bond prices up and yields down with the 10Yr UST falling 37bps to 4.00% in only 6 trading days, and 5-year AAA municipal yields declining to 2.59%. It is noteworthy that high quality bonds have buffered equity volatility to a degree, benefiting investors in balanced strategies and offering a reminder of the benefits of asset class diversification.
Tariffs are likely to reduce corporate profits and/or be inflationary as import costs are often passed on to consumers. Business and consumer sentiment has at least temporarily been shaken, as evidenced by falling confidence readings and C-Suite surveys, while the potential for recession is increasing.
Where Do Things Go From Here?
The White House is holding firm, and the President and top aides took a hawkish tone over the weekend, expressing a view that “sometimes you have to take medicine,” and that their policy is long-term in nature. On the negotiating front, the Administration is stressing that dozens of countries have reached out to initiate tariff talks. How much dialogue is actually taking place is not known, although the importance of the US market creates significant leverage.
Behind the scenes, there are also signs of GOP anxiety relative to the severity of the President’s trade stance. Rectifying what he sees as “bad trade deals” and “unfair trade practices” has long been a policy objective, although what constitutes “victory” and a trigger to roll back certain tariffs is an open question.
Street consensus now calls for a 35-45% chance of a 2025 recession. Should one occur, its length and depth is likely to be influenced by how trade negotiations play out, as well as the extent to which offsetting fiscal and monetary policy measures are able to ease trade-related economic impact. Maintaining announced tariff levels without offsetting policy measures to benefit the economy would significantly increase recession risk. To that end, Republicans in Congress are under pressure to fast-track extension of the 2017 TCJA tax cuts while also introducing wider deregulation to jumpstart growth and forestall a potential downturn. We anticipate developments on this front over the next few months.
Unfortunately, it does not appear that the Fed will be immediately riding to the rescue. Chairman Powell’s weekend comments threw cold water on the notion of rapid easing as he emphasized their inflation control mandate. Our sense is that they will evaluate forthcoming CPI and PPI prints, business and consumer sentiment, and other economic factors in weighing the balance of inflation and growth risks. Easing later in the year is anticipated though and Fed funds futures are pricing in 80bps by the end of Q3. This, coupled with a calming of trade tensions and/or an extension of tax cuts, would likely be positive stock market catalysts.
The VIX, an index measure of volatility, surged to more than 60 on April 7th, far above the 5-year average of 20.7. History offers cause for optimism though, as past periods of extreme volatility have often led to strong forward returns. This speaks to a tendency for markets to bounce back forcefully when sentiment changes, particularly after periods of intense selling. The accompanying chart from Charlie Bilello of Creative Planning details the extent to which investors have been rewarded for staying the course. Reacting emotionally and arbitrarily selling while under stress can harm long-term capital growth should investors miss a subsequent recovery rally.
Back to the Basics
Fundamentals always matter, particularly during stressful and uncertain times. Over the long term, corporate earnings drive stock prices. The S&P 500’s value has demonstrated an exceptionally high 0.97 correlation with S&P 500 earnings growth since 1957 according to Bloomberg data cited by Invesco. Consensus 2025 S&P 500 earnings growth estimates have come down to about +11% and are falling further, while Q1 projections appear to center around +4%. We are carefully evaluating the profit outlook of the companies owned in Appleton client portfolios, as well as those we are considering adding. If management guidance is not overly cloudy and earnings can remain solidly positive, recent sell-off induced valuation reductions make the forward outlook more appealing.
As we always emphasize, a personalized, risk managed asset allocation strategy is designed in part to allow investors to more comfortably stay the course during challenging times. While doing so can sometimes be emotionally taxing, market timing has long proven to be extraordinarily difficult and is not recommended.
We recognize that it doesn’t feel good right now, but if past is prologue, maintaining a risk compatible level of equity exposure should be beneficial longer term. Stock market losses have typically been relatively short-lived, and rebounds pronounced. Since 1945, there have been 15 declines of -10 to -20% and the average recovery time has been only 8 months, a modest price to pay for the compound effect of long-term growth in capital (FactSet, Dow Jones).
Our Equity and Fixed Income teams look at dislocations with a cautious yet opportunistic eye, and are actively engaged in economic, market and security specific analysis with an eye towards identifying investment value. Right now, we are looking to add exposure in quality defensive stocks with less than average tariff exposure that we feel offer attractive relative value.
It can understandably be difficult to avoid overreacting to disconcerting headlines, although we strongly advise stepping back and staying calm. Reassessing one’s risk tolerance as needed and considering time horizon before making any investment decisions is recommended.
This communication may include opinions and forward-looking statements. All statements other than statements of historical fact are opinions and/or forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the beliefs and expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such beliefs and expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements. Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor. While Appleton Partners believes the outside data sources cited to be credible, it has not independently verified the correctness of any of their inputs or calculations and, therefore, does not warranty the accuracy of any third-party sources or information. Nothing in this communication is intended to be or should be construed as individualized investment advice. All content is of a general nature and solely for educational, informational and illustrative purposes.
"The high-grade tax-exempt markets are typically characterized by relative price stability, particularly when contrasted with lower grade credits, let alone equities. But it’s been anything but the case so far in April, as extreme volatility has driven up municipal yields at an unusual pace. Advisors and investors are understandably looking for answers, and we aim to provide some below. The primary driver of this turbulence is a liquidity crunch, which has been exacerbated by the factors noted below..."
"Exchange-Traded Funds, or ETFs, have arguably been one of the most important investment innovations in recent decades. They allow retail investors to combine the modest investment minimum and broad diversification benefits of mutual funds with the real time intra-day liquidity of stocks. Further, ETFs also offer tax efficiency, in part by not requiring a sale of securities (and the potential realization of capital gains) to meet other investors’ withdrawals..."
Economic & Market Commentary
04.07.2025
Tariff Turmoil: Observations and Advice
Cutting through the “noise” during times of high market volatility can be challenging but this piece attempts to do so by offering our perspective concerning recent market events, some historical context, and a few forward thoughts. Appleton’s Wealth Managers are available to discuss your personal circumstances, so please reach out.
Global Trade Relations Rocked by Tariff Announcements
While it was widely expected that the second Trump Administration would take a hawkish stance on trade policy, expectations of modest tariffs increases used primarily as negotiating tools appear to have been overly optimistic. Using a controversial interpretation of emergency economic powers, April 2nd’s announcement of a universal 10% tariff coupled with individual “reciprocal tariffs” stunned markets, leading to a rapid and pronounced stock market slide.
Fed Chairman Powell emphasized on April 4th that the proposed tariffs were “significantly larger than expected” and will probably lead to “at least a temporary rise in inflation.” According to Strategas, the announced tariffs amount to 2.2% of GDP and are effectively twice the size of the largest tax increase in modern US history.
Isaac Newton long ago stressed that “for every action, there is an equal and opposite reaction.” While his findings led to breakthroughs in physics, not economics, there is a good deal of market applicability. An onerous 34% rate assessed on Chinese imports was quickly matched by China, a move some believe was designed to pressure US markets and policymakers. As we write, there are reports of possible further increases in Chinese goods if their retaliation is not rescinded, suggestions that the EU will soon vote on retaliatory measures, and suffice it to say, other countries are considering their own responses. Forcing trade partners to the table may be an Administration objective, but it creates a great deal of uncertainty that markets have difficulty pricing.
Initial Economic and Market Reaction
The last few days have produced a painful “risk-off” reaction with the S&P 500 posting -4.8% and -6.0% days to close last week’s trading, shedding $6.6 trillion in value. This was the sharpest 2-day fall since the onset of COVID in March 2020, and further declines have been incurred so far during April 7th trading.
As might be expected, a flight-to-quality has driven high-grade bond prices up and yields down with the 10Yr UST falling 37bps to 4.00% in only 6 trading days, and 5-year AAA municipal yields declining to 2.59%. It is noteworthy that high quality bonds have buffered equity volatility to a degree, benefiting investors in balanced strategies and offering a reminder of the benefits of asset class diversification.
Tariffs are likely to reduce corporate profits and/or be inflationary as import costs are often passed on to consumers. Business and consumer sentiment has at least temporarily been shaken, as evidenced by falling confidence readings and C-Suite surveys, while the potential for recession is increasing.
Where Do Things Go From Here?
The White House is holding firm, and the President and top aides took a hawkish tone over the weekend, expressing a view that “sometimes you have to take medicine,” and that their policy is long-term in nature. On the negotiating front, the Administration is stressing that dozens of countries have reached out to initiate tariff talks. How much dialogue is actually taking place is not known, although the importance of the US market creates significant leverage.
Behind the scenes, there are also signs of GOP anxiety relative to the severity of the President’s trade stance. Rectifying what he sees as “bad trade deals” and “unfair trade practices” has long been a policy objective, although what constitutes “victory” and a trigger to roll back certain tariffs is an open question.
Street consensus now calls for a 35-45% chance of a 2025 recession. Should one occur, its length and depth is likely to be influenced by how trade negotiations play out, as well as the extent to which offsetting fiscal and monetary policy measures are able to ease trade-related economic impact. Maintaining announced tariff levels without offsetting policy measures to benefit the economy would significantly increase recession risk. To that end, Republicans in Congress are under pressure to fast-track extension of the 2017 TCJA tax cuts while also introducing wider deregulation to jumpstart growth and forestall a potential downturn. We anticipate developments on this front over the next few months.
Unfortunately, it does not appear that the Fed will be immediately riding to the rescue. Chairman Powell’s weekend comments threw cold water on the notion of rapid easing as he emphasized their inflation control mandate. Our sense is that they will evaluate forthcoming CPI and PPI prints, business and consumer sentiment, and other economic factors in weighing the balance of inflation and growth risks. Easing later in the year is anticipated though and Fed funds futures are pricing in 80bps by the end of Q3. This, coupled with a calming of trade tensions and/or an extension of tax cuts, would likely be positive stock market catalysts.
The VIX, an index measure of volatility, surged to more than 60 on April 7th, far above the 5-year average of 20.7. History offers cause for optimism though, as past periods of extreme volatility have often led to strong forward returns. This speaks to a tendency for markets to bounce back forcefully when sentiment changes, particularly after periods of intense selling. The accompanying chart from Charlie Bilello of Creative Planning details the extent to which investors have been rewarded for staying the course. Reacting emotionally and arbitrarily selling while under stress can harm long-term capital growth should investors miss a subsequent recovery rally.
Back to the Basics
Fundamentals always matter, particularly during stressful and uncertain times. Over the long term, corporate earnings drive stock prices. The S&P 500’s value has demonstrated an exceptionally high 0.97 correlation with S&P 500 earnings growth since 1957 according to Bloomberg data cited by Invesco. Consensus 2025 S&P 500 earnings growth estimates have come down to about +11% and are falling further, while Q1 projections appear to center around +4%. We are carefully evaluating the profit outlook of the companies owned in Appleton client portfolios, as well as those we are considering adding. If management guidance is not overly cloudy and earnings can remain solidly positive, recent sell-off induced valuation reductions make the forward outlook more appealing.
As we always emphasize, a personalized, risk managed asset allocation strategy is designed in part to allow investors to more comfortably stay the course during challenging times. While doing so can sometimes be emotionally taxing, market timing has long proven to be extraordinarily difficult and is not recommended.
We recognize that it doesn’t feel good right now, but if past is prologue, maintaining a risk compatible level of equity exposure should be beneficial longer term. Stock market losses have typically been relatively short-lived, and rebounds pronounced. Since 1945, there have been 15 declines of -10 to -20% and the average recovery time has been only 8 months, a modest price to pay for the compound effect of long-term growth in capital (FactSet, Dow Jones).
Our Equity and Fixed Income teams look at dislocations with a cautious yet opportunistic eye, and are actively engaged in economic, market and security specific analysis with an eye towards identifying investment value. Right now, we are looking to add exposure in quality defensive stocks with less than average tariff exposure that we feel offer attractive relative value.
It can understandably be difficult to avoid overreacting to disconcerting headlines, although we strongly advise stepping back and staying calm. Reassessing one’s risk tolerance as needed and considering time horizon before making any investment decisions is recommended.
This communication may include opinions and forward-looking statements. All statements other than statements of historical fact are opinions and/or forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the beliefs and expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such beliefs and expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements. Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor. While Appleton Partners believes the outside data sources cited to be credible, it has not independently verified the correctness of any of their inputs or calculations and, therefore, does not warranty the accuracy of any third-party sources or information. Nothing in this communication is intended to be or should be construed as individualized investment advice. All content is of a general nature and solely for educational, informational and illustrative purposes.
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