Trump Tariffs 2025: How We Got Here and What Lies Ahead for the Market

How We Got Here...

Last Wednesday April 2nd was expected to be “Liberation Day” for America, but it quickly turned into “Liquidation Day” after the Trump Administration’s reciprocal tariff announcement far exceeded expectations.

Initially, the markets rallied in after-hours trading when President Trump announced a uniform 10% tariff on all imports. This was a relief to many who had feared significantly higher tariffs across a broader range of goods. However, the optimism was short-lived—lasting only about ten minutes—before market sentiment reversed sharply. The developments since then need little explanation.

The global market’s concern stems from the way reciprocal tariffs were calculated, particularly in relation to countries with which the U.S. has the largest trade deficits. Rather than matching the tariff rates those countries impose on U.S. exports, the new policy imposes tariffs equal to 50% of the percentage of the U.S. trade deficit with each country. 



For example, let’s look at the trade deficit with the European Union: In 2024, the European Union imported $370.2 billion worth of goods from the U.S., while the U.S. imported $605.8 billion from the EU. This created a trade deficit of $235.6 billion—approximately a 39% difference between exports and imports. Based on this discrepancy, the reciprocal tariff imposed on EU goods was calculated as half of that percentage (39%), rounded up to 20%. The calculation to reach the reciprocal tariff levels caught the entire world off guard and is the major reason why we have seen the recent market meltdowns.

Key Components of the New Tariff Plan:

• A baseline 10% tariff on all imported goods across the board (effective April 5th)

• Approximately 60 countries are subject to higher tariffs above the baseline 10% due to significant trade deficits with the U.S.

• Previous tariffs will remain in place

• Canada & Mexico are not subject to new tariffs, but existing 25% tariffs on non-USMCA goods remain in place

• Specific goods—including aluminum, lumber, copper, and pharmaceuticals—are currently exempt from these new tariffs

Global Reactions to Trump Tariffs 2025

We must assume that the aggressive nature of Trump’s reciprocal tariffs is designed to push countries to the negotiation table quickly, as maximum pain has now been released into global markets. In 2024, the overall US Trade Deficit grew by 17%, reaching nearly $920 billion—leaving a lot of room for negotiation. 



Since the announcement on Wednesday afternoon, we have seen the following responses:

• China Retaliation – On Friday morning, China announced a 34% increase in tariffs on U.S. goods—matching the reciprocal tariffs imposed by the U.S. China remains one of America's largest trading partners and holds the largest trade deficit with the U.S., nearly $300 billion in 2024. This retaliation contributed significantly to Friday’s market sell-off.

• Canada Responds – Canada announced matching 25% tariffs on all U.S. goods not covered under the USMCA agreement, including automotive-related products.

• Mexico Celebrates – Unlike Canada, Mexico was exempted from the reciprocal tariffs. Officials publicly celebrated the protection granted under the USMCA, originally signed during Trump’s first term.

• Vietnam Offers Concessions – Although not the largest trading partner, Vietnam represents one of the largest U.S. trade deficits—$123.5 billion in 2024. On Sunday, Vietnam announced it would eliminate all tariffs on U.S. imports in an effort to prevent reciprocal tariffs from taking effect.

• Taiwan Signals Cooperation – On Sunday Taiwan also stated they are willing to drop all tariffs as part of a negotiation to create a better trade agreement with the US.   Both Taiwan and Vietnam are important and growing trade partners for the US in the Asia region.

• India Ready to Deal – Early on Sunday India announced that they do not intend to retaliate against the US tariffs and focus on taking significant steps to improve their current trade agreement between the two countries. 

• Japan Announces Cooperation – Early Monday Japanese PM Shigeru announced that his country has no intention to engage in direct confrontation with the US and is willing to cooperate in creating jobs in the US while working toward a better trade deal. 

• The Fed Remains Out of Step – As if Friday’s market decline wasn’t severe enough, Fed Chair Powell's speaking engagement added to the volatility. Rather than addressing political independence, many believe Powell should have convened an emergency meeting to cut interest rates. With the 2-year yield at 3.70% and the Fed Funds Rate at 4.25–4.50%, the Fed is, once again, behind the curve.

The shock triggered by the aggressive tariff measures has raised significant concerns about the future of global trade agreements and the potential cost of cross-border commerce. While more fallout is expected, it is clear that no country—least of all the U.S.—wants a prolonged trade war. We anticipate additional countries will come to the negotiating table in the coming days, though these agreements will take time to finalize. As we witnessed in 2018, such periods are often accompanied by elevated market volatility. Currently, the European Union remains the only major trade partner yet to declare its position.

Why So Aggressive?

While the exact reasoning for the aggressive nature of Trump’s tariffs is unclear, we can speculate:

1. Worst Case Scenario as Leverage – The tariff structure represents a worst-case scenario for many of the United States' trade partners, creating substantial pressure to come to the negotiating table. However, this approach also provides significant room for compromise—potentially resulting in new trade agreements that deliver long-term benefits to the U.S. economy.

2. Attempt to Rebalance Global Trade – U.S. trade has been structurally imbalanced for decades, with the situation worsening in recent years. In 2024, the U.S. trade deficit increased by 17%, reaching a record $918 billion. While achieving a trade surplus may be unrealistic given America’s status as a consumption-driven economy, these tariffs present an opportunity to renegotiate terms and better align trade relationships in favor of the United States over the long run.

3. Addressing U.S. Debt and Interest Burden – The annual interest paid on U.S. Treasury debt has doubled over the past four years and is now nearly equivalent to the country’s military budget. This level of debt servicing is unsustainable, particularly in the face of declining wages in the private sector. With limited alternatives—such as raising taxes or cutting entitlement programs—tariff revenue provides a viable way to help offset rising debt costs.

   
   

The Market: Understanding the Price Action

The action of the market on Thursday and more so on Friday reached an extreme level not usually seen by investors, allow us to review:

• Investor Sentiment Hits Extremes - Overall investor sentiment reached an extreme on Friday:

  •  Put/Call Ratio surged to the 99th percentile.

  • The Volatility Index (VIX) closed above 45 for the first time since 2020.

  • The spot VIX future closed 20 points over its 3-month future value, a correlation that is typically unsustainable.

  • Inverse ETF volume reached a record $30 billion.

  • Everyone is now calling for a recession.

• Broad-Based Selling - Friday’s selling was indiscriminate, virtually no asset class was spared:

  • 70% of the S&P 500 experienced a decline of two standard deviations or more.

  • The S&P 500 ETF (SPY) traded over 217 million shares, marking one of the highest volume days in the past five years.

  • Traditional Safe Havens such as gold, the Swiss franc, and the Japanese yen all saw significant selling on heavy volume.

  • European Markets, which had been a relative strength area in 2024, were also hit hard.

• Price Action Capitulation Signs - Several of our indicators finally reached typical capitulation levels:

  • 76% of the S&P 50 reached new 20-day lows. 

  • S&P stocks above their 50-day moving average reached only 11%.

  • 60% of the S&P 500 stocks are now down more than 20% year-to-date.

  • High beta stocks vs low beta has reached correlation levels not seen since the depths of the Covid-19 Crash.

    
    

These data points have reached historical extremes—levels that typically occur only once every few years, if not longer. 

Historically, such readings often coincide with market bottoms or periods of stabilization.

Although a lot of damage has occurred, the S&P has still held above the major trend line support of the 2022 lows.  This support level is around 4,875.  Look for this area to offer some support near term.

Data Derived From E-Signal

One noteworthy point regarding the chart above, which illustrates the S&P 500's trend line support, is worth highlighting. Now that recession concerns are becoming more mainstream—with market participants using the "R-word" more freely—we believe it’s important to address the potential downside scenario. If the U.S. economy does indeed enter a recession this year, we estimate that the S&P 500 could decline toward the 4,500 level.

With the index opening Monday near 4,900, the market has already priced in approximately 75% of the potential downside implied by our recession-based forecast.

The Market: What Lies Ahead

Forecasting future market movements is never easy, particularly following a sharp and aggressive short-term decline. Each market recovery is unique. For example, during the COVID crash in 2020, few—if any—experts predicted how quickly the market would rebound. At the time, much of the commentary echoed themes of crisis and collapse, similar to what we’re hearing today.

Our responsibility is to evaluate the current market environment in the context of historical parallels, using data, sentiment, and structural behavior to help chart a path forward. Based on recent market action, sentiment indicators, fear levels, and external pressures, we see similarities between today’s environment and the following two historical episodes:

1. Long Term Capital Management (LTCM) Collapse 1998- Long Term Capital Management was a highly leveraged hedge fund that business with nearly every important person on Wall Street and its failure in the summer of 1998 send ripples around the global markets like what we are seeing today.

Data Derived From E-Signal

After the S&P 500 reached a new all-time high of 1,186.75 on July 17, 1998, the fear surrounding the potential collapse—and eventual failure—of Long-Term Capital Management (LTCM) triggered a sharp sell-off. Over the next month and a half, the index fell 18%, bottoming at 973.89 on September 4, 1998. 

The fear leading up to LTCM’s failure was responsible for the steepest part of the decline. Following the fund’s collapse and subsequent bailout, the market remained volatile, trading in a wide range and ultimately making a slightly lower low on October 8. However, this secondary decline occurred on significantly improved market internals, with notably less selling pressure and more stability across key indicators.

The critical takeaway from this episode is that the most extreme fear and selling pressure occurred during the initial drop. The follow-through decline, while creating a lower low, did so on a healthier market foundation. From the October lows, the S&P 500 began a sustained recovery, recapturing all prior losses by Thanksgiving of that year.

2. Euro Debt Crisis and US Debt Downgrade (2011) - After beginning in 2009, the growing debt crisis among certain nations inside of the European Union reached it heights during the spring and summer of 2011.  Adding to market anxiety was the downgrade of U.S. sovereign debt by major credit rating agencies in August 2011, driven by protracted political debates surrounding the U.S. debt ceiling. Combined with rising fears of a potential double-dip recession, investor sentiment deteriorated rapidly.

Data Derived From E-Signal

After making a near-term high at the end of April 2011, the S&P 500 posted a secondary, lower high on July 7, 2011, at 1,353.22. From that point, the index declined 17.25% over the following month, bottoming on August 8, 2011, at 1,119.46.

Following that low, the market traded sideways as global investors grappled with ongoing instability in the European Union and the fallout from the U.S. sovereign credit downgrade—its first in history. The final phase of this correction occurred on October 3, when the S&P made a slightly lower low but on significantly reduced selling pressure and stronger internal market indicators.

A simple way to observe this change in market dynamics is by analyzing trading volume in the SPDR S&P 500 ETF (SPY):

• On August 8, 2011, SPY traded 702 million shares

• On the October 3 retest, volume was just 365 million shares

  
  

This near-50% drop in volume on the retest, coupled with stronger market internals, served as a classic "all-clear" signal—and it proved accurate. From that final low, the S&P 500 began a sustained five-month rally, eventually recovering all of its losses.

This is the type of market pattern we expect to see in the coming weeks—and we’re already starting to observe it today, with price action swinging sharply in both directions throughout the morning.

The environment remains highly fluid, and we anticipate continued volatility as markets digest new information and respond to developments related to President Trump’s tariff announcement. Until greater clarity emerges through negotiations or concrete policy outcomes, we expect the market to remain range-bound and reactive.

Investor fear will remain elevated, and the media will likely continue to push narratives of global collapse and economic turmoil—that’s a familiar part of the cycle in times of uncertainty. Our job is to focus on data, price structure, and sentiment, rather than headlines.

Conclusion

We believe the worst of the market decline is likely behind us, as nearly all of our internal indicators are as stretched as we've seen in years. While this doesn’t necessarily mean the market will bottom today or even this week, it does suggest that the most intense phase of downside pressure has likely already occurred.

From here, the market will require time to repair and rebuild the technical and psychological damage sustained. This process will likely involve continued choppy, range-bound trading—with periods of both higher and lower prices.

Importantly, we are closely monitoring for a second retest of the recent lows, ideally occurring on lighter volume and improved market breadth. That type of price action would serve as a strong technical signal, potentially marking the true bottom from which we could look to position more aggressively.

Brad Tremitiere

Chief Investment Officer