Three possible directions for tariff-roiled markets

Markets rise and markets fall. Sometimes they respond to external factors like a pandemic or internal ones like a financial crisis sparked by ill-informed risk taking. Sometimes they climb on enthusiasm for new technologies that have the potential to shape the future in impactful ways. But always, markets are social systems influenced by collective and individual human behavior. There are no natural laws we can count on to assure ourselves of success.

Last week, we saw the financial markets respond to the Trump Administration’s announcement of a broad set of tariffs designed to reset the ways countries trade with each other. The global trade system that persisted for decades was not perfect but the rules of the game, and the ways some countries sought to evade them, were widely understood.

Since the announcement on Wednesday, political pundits have criticized investors and their advisors for not anticipating the expansiveness of the tariff announcements. Of course, if the full extent of the tariffs could have been known with foresight, which they couldn’t, future being what it is, markets would have sold off sooner with the same result—lower stock prices and higher bond values.

The markets are sending a clear signal: a global trade war is expected to lead to higher prices (inflation), slower growth, and more uncertainty in the short term as businesses, institutions, and global leaders adjust to a more transactional and protectionist world. Stock prices adjusted in line with this more negative outlook.

What are investors to do? I found a recent article from Jason Zweig of the WSJ to be a helpful reminder about what investors can do when making decisions in an uncertain environment for which there is no recent playbook to consult. Zweig encourages investors to avoid making large decisions that would cause regret if they were wrong. Smaller decisions can ease anxiety in times of market uncertainty and won’t adversely affect the investors financial situation if they turn out to be wrong. Big decisions with the potential to lead to significant regret should be avoided.

We don’t know what will happen. We can’t. Among the many possible outcomes, we offer three possibilities:

• First, the shock to the global system could bring countries together quickly to negotiate a rollback of tariffs, limiting the damage of the initial, comprehensive tariff regime imposed on April 2. Markets would likely respond favorably to announcements of agreements between the U.S. and key trading partners.
• A second possibility is that the Trump Administration remains steadfast in its position that the reset in the global economic order is the medicine needed to bring long-term prosperity, at least for Americans. Depending on the response of the rest of the world—acceptance or retaliation—a transition to re-shoring key industries to the U.S. would take years, prolonging the uncertainty of the current period.
• A third possibility is that the U.S. tariff announcement sets off tit-for-tat tariffs that eventually become too painful to sustain, ushering in a period of deal-making. Escalation of this type would be viewed negatively by financial markets, which would enforce their discipline by sustaining a sell-off.

Of course, something completely different could also occur. This should not be a surprise to us.

Investing is inherently risky, which is easy to forget after the S&P 500 rose more than 55% during the two-year period ending in December 2024. Ultimately, the financial markets are apolitical: investors will continue to respond to policies and their outcomes, just like they always have.

Over the long run, investors have been rewarded for accepting the risk that comes with investing. We expect this to continue.