First Quarter 2025

A Different Perspective

The first quarter of 2025 began well, but as the talk of tariffs escalated, the markets became more volatile, and much of the early-year gains were lost.

Many of the key indices were negative at the end of the quarter. The Dow Jones Industrial Average was -1.3%, the S&P 500 was -4.6% the MidCap 400 was -6.5 and the SmallCap 600 was -9.3%. The MSCI ACW ex-USA (international index) was a bright spot with a gain of 4.6%. The yield on the 10-year Treasury was 4.25%, and the one-year yield on the Aggregate Bloomberg average was 4.88%.²   

This is where things stood at the end of the quarter. At this point, the markets assumed that President Trump’s tariff plans would target specific countries and specific areas of “unfair” trade practices.

Tariffs Arrive

The assumptions held by investors turned out to be utterly incorrect. When the President announced his tariff plan, in addition to targeting certain countries with high tariffs that he felt didn’t play fairly, he also added an across-the-board 10% tariff on all countries. This approach has resulted in a significant drop in the equity markets, bond markets, and a decline in the value of the dollar. It has also increased the volatility of markets, both here and around the world.

World Response

Two of our closest allies, Canada and Mexico, who had negotiated a trade agreement with President Trump during his first term, were stunned by the tariffs he was imposing on them. One of the items that President Trump didn’t like was that Canada was producing so much of the aluminum that was being used in the U.S. The reason for this has been clear for many years. Canada has cheap hydropower, and it takes a great deal of energy to produce aluminum. This will now mean that the cost of cars and trucks, many of which use a great deal of aluminum in their construction, will be more expensive and thus add to inflation. Our European allies now wonder about U.S. relations and the impact on the world economy with these disruptive tariffs. As the dollar sinks in value against foreign currencies, this brings higher prices in the U.S. in addition to the increased prices from tariffs.

A Reckoning

As the impact of tariffs settled in, President Trump realized that the across-the-board tariffs on all goods coming from a foreign country could be more destructive than the trade imbalances. He paused tariffs for 90 days, then indicated that he was willing to negotiate each country’s tariffs. He did not pause the 25% automotive tax, and the tax on automotive parts takes effect in May. While China now has a tariff of 145%, he allowed an exemption for certain electronic products coming from China.

As stated in a Wall Street Journal article, published April 14, 2025, “At China’s Wholesale Hub, U.S. Orders Have Suddenly Halted. One Example: Socks.”⁵ Socks seem to be quite insignificant as far as trade goes. According to the article, socks are made in China and sold at the wholesale level at 25 cents a pair. The skill, speed, labor, and low cost of making socks is unlikely to be a type of production that a U.S. firm will want to engage in. That’s why in 2023, China accounted for 56% of American imports of socks and stockings. So, how many other items that we are accustomed to buying from overseas that do not lend themselves to American manufacturing are there?

Potential Big Tax Increase Coming

As Congress works on a tax bill that may lower the taxes of Americans, the tariffs are apparently going to raise substantial additional revenues.

On March 31, 2025, a Wall Street Journal article quoted Peter Navarro, Mr. Trump’s chief trade advisor, who indicated that the new tariffs will raise about $6 trillion in tax revenues over the next 10 years. This could result in about $600 billion each year and is in addition to an estimated $100 billion that will be raised from automotive taxes annually.⁴

What’s Next

We believe the reason for this turmoil and volatility in the markets is that the U.S. Government’s message on tariffs and the overall economy is very unclear. This is the case for the American people and for the rest of the world. While President Trump has told Americans that there will be difficult times during the period he’s implementing this new strategy, it’s one thing to say it, but it’s another for the American people to be living it. Watching automotive prices escalate, seeing retirement plan assets drop, and the cost of groceries continuing their upward trend is resulting in consumer negativity. Each President likes to look back on their first 100 days in office and see what they’ve accomplished. Most of what President Trump has initiated, he spoke about while campaigning for office. The problem now is that the economy is slowing as consumers become wary of prices, job security, and financial stability. The consumer is the key to the U.S. economy.

Individuals, companies, and countries can manage if they know what the “deal” is. My big question is: Can the Trump administration bring clarity and discipline to what they are doing? We need to wait for greater clarity before making any profound adjustments.

Ed Mallon