Tariffs Take a Breather: Q1 2025 Market Update

Market Backdrop – A Softening Economy Meets Rising Uncertainty

The first quarter of 2025 brought a modest cooling in the U.S. economy.  From a strong starting point, economic data has shown some softening – a bit slower consumer spending, some deceleration in manufacturing, and the expected drag from elevated interest rates.  None of this is particularly alarming on its own, and under different circumstances, it might have flown under the radar.  But in the context of sweeping new trade policy, the picture becomes more complicated.  What might have been a routine deceleration now feels more consequential, as markets reassess both growth expectations and policy risk. 

The rollout of broad tariffs has raised recession risks.  That much is unavoidable.  Tariffs act as a tax – increasing costs across supply chains and dampening demand.  Those are the first-order effects.  But it is the second-order impacts that make this environment harder to handicap and more dangerous to ignore: the ripple impacts on investment decisions, hiring plans, sourcing strategies, and overall business confidence.  These indirect consequences don’t show up in the data immediately but can meaningfully alter the trajectory of the economy – and may already be in play, even with the current pause in tariffs. 

Volatility returned with force through Q1 and into April.  While core economic fundamentals like employment remained solid and the upcoming corporate earnings season is shaping up reasonably well, those are backward-looking indicators.  The road ahead is less clear.  The range of possible outcomes is unusually wide – and no one has a reliable roadmap.  Not the market.  Perhaps not even President Trump.  Anyone making confident predictions right now is, at best, guessing.  We have been in uncharted territory before, but rarely with this mix of policy uncertainty and macro fragility.      

Tariffs – A Pause, But Not Yet Peace

On April 2, the U.S. administration introduced a sweeping new trade framework – what we called a “New Era of Tariffs” in our last newsletter.  The policy included a 10% blanket tariff on all imports, along with steeper, reciprocal country-specific tariffs – most notably, a 34% rate on Chinese goods and 20% on EU imports.  Following a rapid round of retaliatory and counter-retaliatory measures, the U.S. tariff on Chinese imports escalated to 145% one week later, highlighting just how quickly the situation is evolving.    

These reciprocal tariffs were technically in effect – for about 12 hours – before a sudden reversal.  President Trump announced a 90-day delay in implementation.  It is not entirely clear what prompted the shift, but the timing was telling: markets were in turmoil, bond yields were flashing warning signs, and a growing chorus of business leaders – from Jamie Dimon to, yes, even Elon Musk – voiced public concern.  Several of the President’s political allies also urged restraint. 

Whatever the catalyst, markets welcomed the temporary reprieve.  The pause opens a window for negotiation – and that matters.  This is, in many ways, an internally driven policy challenge.  There is reason to hope that the right pressure or incentives could steer things toward a negotiated solution. 

Of course, the story is far from over.  What we are seeing may be part of a broader, longer-term shift toward a more protectionist global trade environment.  That kind of realignment doesn’t reverse overnight.  Even with a pause in place, smart companies are already moving to adapt – reconfiguring supply chains, diversifying sourcing, and reassessing exposure to policy-driven disruption. 

Our Portfolio Moves – From Proactive Defense to Prudent Offense

A volatile first quarter reminded us of the value of discipline and flexibility.  After two strong years of market returns, we entered 2025 with a cautious mindset, anticipating a pickup in volatility.  Before the recent drawdowns, we had already taken several defensive steps:  trimming exposure in more vulnerable areas, and raising cash to above-average levels as a buffer of dry powder.  We continue to favor high-quality companies while maintaining a below-market exposure to higher-valuation technology and “Magnificent 7” names – areas we saw as more exposed to downside in a market slowdown. 

We had allowed equity allocations to drift slightly toward the higher end of their target ranges during the market’s strong run.  More recently, where appropriate, we rebalanced those positions closer to target.  On the fixed income side, we continue to extend maturities, taking advantage of elevated yields and locking them in for the longer term.  These were not reactive moves – they were deliberate decisions made in response to our view of growing risks.  In short, we battened down the hatches before the storm.        

When the market pullback arrived, we were ready.  As valuations reset, particularly in companies we know well and have long-term conviction in, we shifted from defense to selective offense.  No one can time a market bottom perfectly – but with more compelling entry points, we began putting cash to work gradually.  Our focus is on industry leaders with durable competitive advantages, strong balance sheets, and the capacity to weather economic headwinds.  We leaned into names with domestic strength and potential upside in the evolving trade environment, rebuilding exposure steadily as conditions allowed.        

These decisions are a reflection of our active management philosophy – staying engaged, adjusting when conditions change, and acting decisively when the environment demands it. 

Looking ahead, we remain focused but flexible.  The 90-day pause in tariffs gives markets a bit of breathing room, but we are not treating it as a resolution.  Key factors like trade dynamics, inflation, central bank policy, and corporate earnings guidance are all still unfolding.  We are positioned for a range of outcomes, and we will continue managing toward long-term results – grounded in fundamentals, and not driven by headlines or speculation. 

Thank you, as always, for your continued trust.