What is going on in the market? Trump’s Tariffs and New Economy
What is going on in the market? Trump’s Tariffs and New Economy
The current market landscape is marked by volatility and uncertainty, driven by several key factors. Inconsistent (as referred Tump, “flexible”) tariff policies imposed by Trump have raised serious concerns about the stability of the US and global economy, while recent labour data indicates that the US economy is gradually slowing down, defying earlier robust forecasts (to be fair, signals are still mixed at best). Additionally, the debut of China AI’s Deepseek has sparked concerns that US AI Tech sector may be over-spending and over-valued, with top tech stocks diving below their resistance levels, as observed in the market. This week, we will share our thoughts on these developments and asset allocation strategies to navigate this unpredictable market.
Tariffs
Tariffs remain one of the primary concerns (at this point, might clinch the top spot). Since February 4, 2024, when the Trump administration imposed a 10% tariff on China exports, including those from Hong Kong—the S&P 500 index has declined by nearly 7% (as of March 13, 2025, HKT). We believe that the continued imposition of tariffs will gradually increase the negative impact on the overall capital market. As more tariffs are implemented, consumer prices are bound to rise, while consumer sentiment declines given lack of visibility into the future. Our view is that Trump's strategy of imposing a series of tariffs is aimed at making America great again while lowering inflation. However, it remains unclear whether these measures will boost the local economy or simply add to market uncertainty. What we can see for now is that Trump is enjoying using Tariffs as a “carrot and stick” tactical play - dangling the benefits of falling in line or risking the big axe to come. The direct impact of these tariff policies is currently unpredictable – what is surly happening is that Tariffs would be talk of the town in the foreseeable future; so far, they have lowered consumer confidence and slowed economic growth – with positive benefits to the US public yet to be seen.
Case in point: Initially, Trump's plan intended to double tariffs on Canadian steel and metal to as high as 50%. This aggressive move was meant to pressure trade partners and influence market dynamics. Canadian government responded with swift retaliatory actions, such as the Canadian province of Ontario suspending new 25% charges on electricity exports to certain northern US states, Trump's plan was ultimately cancelled to maintain the tariffs at 25%. Such rapid shifts in policy underscore the high-stakes environment in which these decisions are made.
Compounding these domestic challenges are retaliatory measures from other countries. For instance, China has imposed agricultural tariffs on US products, and Canada has imposed tariffs on nearly C$30 billion worth of US imports. These counterattacks not only escalate trade tensions between the US and other countries but also intensify pressure on the US economy, as the nation is no longer a manufacturing hub for machinery and electrical equipment, precious metals, and chemical products, and is heavily reliant on imports from countries like Mexico, Canada, and China. As you can see, with many tariffs still pending full effect, the cumulative impact is expected to lead to an economic slowdown, placing additional strain on market dynamics and investor confidence.
This week, we have seen both the CPI and PPI signal that inflation is easing, a positive indicator for the equity market. However, this improvement is not due to concerns about continued tariffs, including a 200% tariff on EU alcoholic products. Looking ahead, we expect inflation to grow over the next three to six months as the impact of tariffs ultimately reflects at the consumer level as higher tariffs, higher import prices, higher prices for consumers, higher inflation. The slowing momentum in the economy is further highlighted by recent labour market data. Last week’s non-farm payrolls increased by 151k, missing the market expectation of 160k, while the unemployment rate rose by 0.1%. These two key indicators reinforce our view that GDP will likely contract this quarter, keeping equities under pressure.
Although the manufacturing PMI improved in February and the paid index rose to 62.4, we believe that tariffs will dampen manufacturing activities in the short term. Additionally, the USD might face further pressure against other currencies. These combined factors point to a more challenging economic environment ahead, where the cumulative impact of tariffs and softer labour market data could slow growth even further.
Asset Allocation
Meanwhile, the market keeps moving forward, and these policy changes, although disruptive, also offer opportunities. Volatility gives investors a chance to buy on dips and sell volatility during short-term fluctuations. As these shifts continue, we must consider not only the impacts of tariffs but also the importance of proper asset allocation to thrive in this rapidly changing market.
One effective asset allocation strategy in the current uncertain environment is to increase exposure to short term bonds. The yield curve is favouring a short duration allocation, indicating that these instruments are less sensitive to market volatility while still offering a reasonable return. Given the volatility in equity markets and the persistent uncertainties from fluctuating tariffs to mixed economic data, we believe that moving toward lower risk assets like short term investment grade bonds can help preserve capital and provide stability.
In addition to short term bonds, another effective strategy is to focus on strong fundamental stocks by buying on dips and selling volatility. When the market drops significantly, it presents an attractive entry point for acquiring high quality stocks at lower valuations. At the same time, heightened volatility allows investors to sell options, such as puts, to secure better strike prices and premiums which can be treated as a yield enhancement tool. These two approaches not only capitalize on temporary market dislocations to build positions in solid companies but also generate additional income to offset market uncertainties. Overall, this strategy aligns with our view that despite ongoing economic challenges, strategic moves in fundamental stocks can offer both growth potential and stability.
For active investors, VIX hedging strategies can further protect equity positions. By using options or VIX based products, investors can effectively hedge against sudden market downturns and mitigate potential losses during periods of heightened volatility. This approach serves as an additional layer of risk management, complementing broader asset allocation strategies in an uncertain economic environment.
Conclusion
Despite ongoing tariffs and economic uncertainty, asset allocation remains the cornerstone of investment management. With market volatility driven by unexpected trade policies, shifting economic data, and labour market fluctuations, it's more important than ever to diversify across asset classes. Focusing on lower-risk assets, such as short-term bonds, can help preserve capital, while strategic moves like buying dips in strong fundamental stocks and selling volatility options can further enhance yield and create entry opportunities. Ultimately, a well-balanced asset allocation is key to embracing market turbulence and securing long-term returns.
