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TD Wealth Market Reflections: Markets React to Trade Tariffs
By TD Wealth Chief Investment Office
The American author and humorist, Mark Twain, once famously quipped that "Apparently there is nothing that cannot happen today". For many investors, the political and market events of recent days will have left them feeling much the same way. Below we review recent tariff developments, market reaction so far and the perspective TD Wealth believes is important for investors now.
Recent Tariff Developments
On what quickly became one of the most anticipated days of the year, the U.S. administration unveiled sweeping reciprocal tariffs which were higher and more far-reaching than many economists and investors had anticipated. The so-called 'Liberation Day' announcements, on April 2nd, imposed a double-digit levy on all countries exporting to the U.S. Global equity markets and Treasury yields fell sharply over the following days on concerns over the economic impact of such policies, along with the prospect of retaliatory tariffs.
The announced policy included a baseline 10% tariff on the imports of nearly all U.S. trading partners, becoming effective on April 5th. Upward revisions will also subsequently apply to 60 countries on April 9th, bringing the effective tariff rate charged by the U.S. to its highest level in nearly a century. Countries likely to be the most impacted include China (which now faces a total stacked tariff rate of over 54%), the European Union (20%), and Vietnam (46%), although the effects, like the policy, are expected to be widespread.
China has already announced that it will retaliate in equal force while the European Union is also preparing coordinated countermeasures. As TD Economics has noted, some hope remains that negotiations can lead to the removal or reduction of some tariffs before their full impact is felt, but for the time being it appears that we may be witnessing the opening shot of a trade war unlike any seen in generations.
The Market Reaction So Far
Financial markets reacted swiftly to the tariff announcements. Just weeks after recording a fresh all-time in February, the S&P 500 Index of large cap U.S. companies staged the largest multi-day retreat since March 2020, extending year-to-date declines as investors questioned the valuation and growth prospects of domestic equities.
The energy and information technology sectors led the index lower at the start of the new quarter, with the 'Magnificent Seven' group of technology heavyweights being hit particularly hard. These companies have had a disproportionate contribution to the rise of the index over the past few years, and likewise, are now dragging the index lower. International equities, while spared the worst of initial declines, also moved sharply lower.
Investor caution has extended to fixed income markets in recent days, with a flight to safety highlighting the more defensive role of government bonds. Treasury yields, which move inversely with price, have declined meaningfully so far in April, with the benchmark 10-year yield briefly dipping below the 4%-level for the first time in almost 6 months. Reaction from the bond markets may also reflect already softening economic data. As TD Economics has highlighted, the closely watched ISM manufacturing and services purchasing manager indexes both showed a slowdown in demand and hiring activity in March, with business sentiment weakening on trade uncertainty. The value of the U.S. dollar has also come under pressure.
Our View
While the announced tariff policy caught many by surprise, the big unknown now is duration. The most recent forecast from TD Economics assumes that the peak tariff rate remains in effect for just six-months, after which most countries (except for China) see some reprieve. Should the tariffs remain elevated for longer, the odds of U.S. economic stagnation rise.
Should the new tariffs become permanent, TD Economics estimates the government could generate an additional $6 trillion in revenue over the next decade, more than offsetting the cost to extend the Tax Cuts & Jobs Act. While extending the act avoids fiscal tightening, it is not expected to provide an additional boost to momentum.
Federal Reserve Chair Powell recently noted that while the impact of tariffs remains uncertain, they were likely to produce "higher inflation and slower growth". With the next Fed meeting just over a month away, policymakers will need to carefully judge which impact is likely to dominate in the medium term. Continued patience from the Fed has kept bond yields elevated, providing room to adjust policy rates in response to continued economic or market uncertainty.
We expect above trend volatility in equities, interest rates, and foreign exchange values to persist over the coming weeks and months. Financial markets are likely to increasingly reflect the priorities and policies of the new U.S. administration, along with the acceleration of artificial intelligence, digital trends and heightened geopolitical tensions globally.
TD Wealth will continue to monitor developments and share our insights along with key implications for investors, as they emerge. Periods of heightened volatility and uncertainty can serve as an important reminder of the benefits of a diversified portfolio. Maintaining thoughtful and well-balanced exposures to a wide range of asset classes, sectors and geographical regions can provide investors with the opportunity to benefit from multiple drivers of return, regardless of the market environment. It is our belief that this approach will continue to serve investors well in helping to ultimately achieve their longer-term financial goals and objectives.
Important Perspectives for Investors
- Historical Perspective: Corrections are a normal part of investing, stay diversified
Market volatility is not unusual, but can be uncomfortable to experience, especially as investors see the value of their portfolios fall. But markets have been here before and recovered.
Broad diversification is a strategy that investors can implement to mitigate the impact of market downturns and help investors keep the focus on their long-term goals. Diversification exposes a portfolio to multiple drivers of return, including exposure to some of the more defensive areas of the market which should serve investors well in such uncertain times. This has been highlighted recently as bonds broadly advanced even while domestic equities suffered consecutive declines.
Investors who have not experienced a change to their goals and objectives should stay the course. Consider that market corrections are a normal part of investing. Since 1980, the S&P 500 Index has experienced average intra-year drops of 14.1% but still delivered positive returns 75% of the time. Historical performance of the stock market points to generally positive returns over time, highlighting another advantage of staying invested. - Long-Term Perspective: Time in the market, not timing the market
Historically, some of the highest-returning days are often preceded by the sharpest declines. This is why making the mistake of selling when the market is falling, can result in missing the subsequent bounce-back in market performance. In fact, missing just the 10 highest-returning days over the past 30 years would have resulted in an investor with an initial $100,000 fully invested in the S&P 500 portfolio missing out on over $1 million compared to staying invested. Investors, who have focused on their long-term plan, have historically achieved greater outcomes.
While the S&P 500 Index remains meaningfully lower on a year-to-date basis, consider that recent weakness follows a period of exceptional gains. Despite heightened volatility so far in 2025, the 1-year return for the S&P 500 Index (Total Return) is only modestly lower, while the 2-year cumulative return remains above 27%, as of the close on Friday, April 4th. - Goals-Based Perspective: Investor's should focus on what is in their control
When global events and the direction of financial markets seems volatile and uncertain, it's important for investors to focus on what is still within their control. Times such as these may be an opportunity to ensure that an individual's investment portfolio is properly aligned with their longer-term financial goals and objectives.
While short-term pull backs can understandably be a source of anxiety, most investors should be focused on goals with a time horizon of more than a day, a week, or even a year. When emotions are running high, sometimes the most valuable asset an investor can have in place is a thoughtful and well-defined financial plan.