After almost reaching bear market territory with the S&P 500 down 19.5 percent from its all-time high during midday trading on Wednesday, the U.S. market abruptly reversed course and rallied on news that U.S. President Donald Trump paused the Rose Garden reciprocal tariffs on many trading partners for 90 days.
The S&P 500 ended Wednesday’s session up 9.5 percent, the biggest single-session rally since October 2008.
Reversal rationale?
Was the tariff pause a deliberate, well-timed maneuver by Trump after more than 70 countries had reached out to negotiate, a development that was part of his broader tariff strategy, as his team stated?
Or was it due to mounting pressures from Republican congressional members, corporate leaders, and small business owners, along with the stock market selloff and stress in the bond market, as was cited by business publications including Bloomberg?
We lean toward the latter, and Trump even acknowledged some of those factors, but you can draw your own conclusions.
Another factor may have been to offset the escalation with China on tariffs and other fronts. Comments by Treasury Secretary Scott Bessent indicate the administration is attempting to convince some countries to take the American side of the U.S.-China trade dispute. Given China’s dominance in international trade and strengths in other areas, we don’t think most countries will oblige; they’d probably rather stand on the sidelines.
Much still hangs in the air
Regardless of the motives, we think the 90-day pause on some tariffs is an indication that at least some of the Rose Garden tariffs probably won’t be implemented at all.
It may also mean that the “big tariffs on everyone” approach—which Republican Senator Thom Tillis dubbed as the “alla prima” approach in a very critical assessment during a Senate hearing—has been shelved by the Trump team.
Therefore, the so-called “end game” of this saga—which we think is still some ways away—could wind up with a U.S. average effective tariff rate below the 24 percent level that RBC Economics had pegged after the big Rose Garden reciprocal tariffs were announced.
Even if Trump does refrain from imposing large tariffs on many trading partners, we think the genie is out of the bottle. The U.S. average effective tariff rate could wind up much higher than the 2.4 percent level in 2024, in our view.
It’s possible Trump will stick with a 10 percent across-the-board tariff on goods from most countries and high tariffs on Chinese goods (although not nearly as high as he’s threatening now)—this is what he campaigned on. And we think he could stick with high tariffs on industries he views as being strategically important like automotive, steel, and aluminum, and he could end up adding high tariffs on other industries.
This is because protectionist practices didn’t just begin with Trump 2.0. We think their roots go all the way back to the global financial crisis in 2008–09 and, more importantly, are intertwined with geoeconomic, geopolitical, and geostrategic changes that have taken place over many years, as we detailed in this report in May 2023.
In the near term, considerable economic uncertainties remain for the U.S., its major trading partners, and the global economy in general.
The 90-day pause leaves a lot of issues about tariff policy hanging in the air. U.S. businesses of all sizes are still faced with supply chain uncertainties and are left questioning their capital allocation decisions and customers’ end demand. Trump’s escalation with China poses separate challenges for the U.S. economy, in our view. And inflation, stagflation, and recession risks linger.
In early March, as tariff headwinds began to blow and Q1 economic data weakened, RBC Economics lowered its full-year 2025 U.S. GDP growth forecast to 1.6 percent from 2.0 percent. Today it lowered the estimate further to 1.0 percent. While it’s not currently forecasting a recession, RBC Economics noted that “U.S. growth still risks contracting should uncertainty or financial instability put additional downward pressure on the economy.” The team also expects U.S. core consumer inflation (excludes food and energy) to spike to 4.3 percent by Q3 of this year from 2.8 percent in March due to tariff-related price pressures. For additional information about the updated U.S. and Canadian forecasts, see this article.
Test of resolve
For individual investors, we think the details associated with the tariff saga are less important than your overall investment strategy.
From our vantage point, the most important takeaway for long-term investors is that this ultrahigh volatility episode in the U.S. stock market is yet another illustration that when equity markets decline rapidly, they can change course abruptly. And quite often, the best approach for long-term investors is to ride out the extreme volatility.
As we pointed out recently, there have been many instances of deep drawdowns in the S&P 500 in any given year, yet the annual return and the market’s path over the medium and long term frequently turned out differently.
Wednesday’s sharp rebound gives investors the opportunity to exhale and get back to the very basics of investing—especially if the downturn rattled your nerves.
This is a good time to consider the following:
- Is your long-term strategic broad asset allocation where it should be given your investment time horizon, stage of life, risk tolerance, financial goals, and other factors? Meaning, is your targeted allocation for stocks, bonds, and cash (and other relevant asset classes) appropriate? We often find that some of the stress associated with extreme market moves is because this long-term strategic allocation is misaligned with either risk tolerance, stage of life, or some other personal factor.
- Is your current allocation roughly in line with your long-term strategic allocation? If not, is there a good reason that it’s offside?
- Is the mix of U.S. versus non-U.S. equity exposure in your portfolio where it should be given your long-term financial goals? U.S. stocks have outperformed international stocks for many years, but if history is a guide, this won’t always be the case. We think a well-balanced portfolio should include a mix of U.S. and non-U.S. (including non-North American) holdings.
- Are the types of equity holdings in your portfolio aligned with your broader financial goals? Meaning, is the proportion of dividend-paying stocks, growth stocks, sector and industry exposures, and stocks in other categories in line with your objectives?
If you’re not sure about some of the questions above, we highly recommend contacting your RBC advisor.
The long-term strategic allocation, and the specific sector, style, and stock allocations that come underneath it are put in place for times like this. They are intended to be an anchor during periods of extreme volatility.
We think financial markets will continue to be volatile in the weeks and months ahead. It’s important to have your long-term investment strategy nailed down, and allocations that correspond to it.