By: Reed C. Fraasa, CFP®, AIF®, RLP®
As fiduciary financial advisors, we strive to remain objective and apolitical in our advice. Political bias can lead investors to make poor decisions, and our role is to offer clear guidance grounded in facts. With that in mind, we offer a measured explanation of the market’s response to President Trump’s newly implemented tariffs.
The Liberation Day Tariffs: Overview and Breakdown
On April 2, 2025, President Trump announced sweeping tariffs described as a "declaration of economic independence." The goal is to address perceived trade imbalances and encourage the reshoring of manufacturing jobs to the U.S. However, the scope and scale of these tariffs have raised concerns about economic fallout and heightened volatility across financial markets.
The tariffs target multiple countries at varying rates:
China: 54% tariff on all imports, the highest rate imposed. China responded with a 34% tariff on all U.S. imports the next day.
Japan: 24% tariff on imported goods, particularly affecting the automotive and technology sectors.
European Union: 20% tariff on all imports, impacting industries from luxury goods to automotive parts.
United Kingdom and Australia: A universal 10% tariff applies despite their status as allies.
Immediate Market Reaction
The markets responded sharply to the announcements:
Stock Market (April 3, 2025): The Dow Jones Industrial Average dropped by 1,679 points (4%), the S&P 500 by 4.8%, and the Nasdaq Composite by nearly 6%. Companies with global supply chains, like Apple and Nike, were hit particularly hard.
Bond Market: Investors sought refuge in U.S. Treasury bonds, pushing yields down as bond prices rose. The U.S. 10-year bond yield fell below 4%, reflecting fears of economic disruption.
Currencies & Commodities: The U.S. dollar weakened against major currencies, and gold prices surged as investors sought safe-haven assets.
Global Markets: The crisis quickly spread worldwide, with European and Asian markets falling by 1.5% to nearly 6%.
The market declines continued today, April 4th, with various markets experiencing another 2% to 4% decline and the Russell 2000 down almost 12% over the two days.
Why the Market Dropped So Fast
Markets are auction-based systems in which prices reflect the collective actions of all buyers and sellers. According to the Efficient Market Hypothesis (EMH), prices incorporate all available information. When new, unexpected information—such as the unprecedented Liberation Day tariffs—enters the market, prices adjust quickly.
Despite President Trump’s previous use of tariffs as a negotiating tool, traders had not anticipated such sweeping measures. This policy surprise prompted a rapid sell-off. The sudden shift also reflects heightened uncertainty, especially given the unorthodox calculation method for setting tariff rates.
Unorthodox Calculation Behind the Tariffs
The administration used a made-up formula called the “Trade Disparity Ratio” (TDR), which measures the perceived economic advantage held by each trading partner over the U.S. The calculation is based on:
U.S. trade deficits are divided by the partner country’s exports to the U.S.
Historical trade imbalances dating back to 1980.
Comparative tariff policies and perceived intellectual property theft.
For example, the U.S. trade deficit with Indonesia last year was $17.9 billion, while Indonesia exported $28 billion worth of goods to the U.S. Applying the TDR calculation ($17.9 billion / $28 billion) resulted in a 64% tariff on Indonesian imports. Vietnam’s tariff on the U.S. was only 5%, but we put a 46% tariff on them.
Economists argue the methodology is overly politicized and lacks transparency. Additionally, the formula's simplicity has created market uncertainty and volatility, as it overlooks nuanced economic relationships.
Broader Economic Concerns
Economists have voiced concerns about the broader impacts of the Liberation Day tariffs, including:
Increased Consumer Costs: Businesses reliant on imports will likely pass these higher costs on to consumers, potentially driving up inflation.
Supply Chain Disruptions: Rebuilding domestic supply chains is lengthy, especially for the electronics and automotive manufacturing industries. Some have estimated that it will take years for the U.S. supply chain to fully rebuild.
Retaliatory Tariffs: China, Japan, and the European Union are already preparing countermeasures, which could further harm U.S. exporters.
Economic Growth Risks: Higher costs and reduced competitiveness could stunt economic growth, with Goldman Sachs projecting a 60% probability of a recession in 2025 if the tariffs remain.
Recession Risk: The concern for a recession is an economic environment with inflation due to the costs of the tariffs but also higher unemployment. Consumer, business, and government spending are all lower, and companies not only stop hiring but start laying off workers. This would significantly hamper the Federal Reserve’s monetary tools to stabilize either risk.
Why Tariffs May Not Achieve Their Intended Goals
If the goal is to bring manufacturing back to the U.S., the strategy faces several hurdles:
Skilled Labor Shortages: According to Deloitte and The Manufacturing Institute, the U.S. manufacturing sector is already projected to face a shortage of 1.9 million workers by 2033.
Global Supply Chain Complexity: Shifting supply chains takes years. Investments in alternative sourcing could be wasted if tariffs are later removed.
Foreign Diversification: Companies are more likely to diversify supply chains to other low-cost countries rather than bring manufacturing back to the U.S. Also, is bringing a $ 5,000-a-year job back to the U.S. in the nation's best interest?
Domestic Capacity Limits: Reshoring efforts are hampered by limited infrastructure and skilled labor shortages, particularly in advanced manufacturing sectors.
Investment Implications
The market's reaction illustrates the potential for ongoing volatility. As financial advisors, we recommend sticking to your long-term investment strategy. While it is natural to feel anxious during uncertain times, making reactive decisions based on short-term events is likely to harm your financial goals.
Diversification: Spreading investments across various asset classes and sectors can help mitigate risk. Over the last two days, owning some bonds and foreign equities (due to the falling dollar) has helped soften the significant U.S. equity losses.
Rebalancing: Maintaining a disciplined approach to portfolio rebalancing as conditions evolve is essential.
Opportunities: Market dips often present opportunities for strategic buying or tax-loss harvesting.
Looking Ahead
It is too early to predict the full impact of the Liberation Day tariffs. However, market history suggests that economic crises often create opportunities for disciplined investors. We will continue to monitor developments and provide guidance as the situation evolves.
If you have concerns or wish to discuss your investment strategy in more detail, please feel free to contact us. Our priority is helping you achieve your financial goals while navigating today's complex market environment.
The foregoing content reflects the opinions of Highland Financial Advisors, LLC, and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions, or forecasts provided herein will prove to be correct.
Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses, which would reduce returns.
Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful or that markets will act as they have in the past.
Reed C. Fraasa is a CERTIFIED FINANCIAL PLANNER™ and founder of HIGHLAND Financial Advisors, a Fee-Only financial planning firm that offers comprehensive financial planning, retirement planning, and investment management. Reed has 30 years of experience as a fiduciary advisor and is the author of The Person is the Plan®, a unique financial planning process. Reed was a frequent guest contributor on PBS Nightly Business Report and has been featured in the New York Times, Wall Street Journal, and Star Ledger newspapers.