Mar 07, 2025 Market Commentary | Tariffs, Tweets, and Tumbles: Making Sense of Market Volatility
Recent tariff announcements by the Trump administration have led to significant market volatility. Investors are facing increased uncertainty as the U.S. imposes new trade restrictions on major global partners, including China, Canada, and Mexico. These tariffs, and the potential retaliatory measures from affected countries, have introduced new risks for financial markets.
Equities: Volatility Spikes and Sector Shifts
Stock markets tend to suffer in uncertainty, and trade tariffs introduce new risks to corporate earnings and economic growth. Once tariffs were announced, companies with international supply chains started facing higher costs, and businesses that rely on exports may begin to see declining demand from overseas buyers.
Not all industries have been impacted equally by tariffs. Some are more vulnerable to trade disruptions, while others may even benefit.
- Industrials & Manufacturing – Companies that produce goods for export, especially those reliant on global supply chains, are experiencing downward pressure. Higher import costs for materials (like steel and aluminum) increase expenses, which can squeeze profit margins.
- Automotive – The auto industry is facing higher costs for raw materials due to metal tariffs, and potential retaliatory tariffs from other countries could hurt U.S. car exports.
- Technology – Tariffs on electronics and components are making tech products more expensive to manufacture, raising concerns about consumer demand and production costs.
- Agriculture – Farmers have been hit hard as countries retaliate against U.S. tariffs by imposing duties on U.S. agricultural exports, leading to lower crop prices and reduced farm incomes.
- Defensive & Domestic-Focused Sectors – Industries such as utilities, healthcare, and consumer staples have fared better since they rely less on international trade. Investors seeking more stability during volatile periods have rotated into these sectors.
How Long Will This Last?
While the initial market reaction to tariffs has been negative, past trade conflicts suggest that markets can stabilize if trade agreements are reached. However, until there is more clarity on trade policy, continued market swings are likely.
Commodities: Trade Wars Impacting Prices
Industrial metals, such as steel and aluminum, have fluctuated in price due to tariffs. While tariffs on imported metals initially boosted domestic prices, weaker global demand has pushed prices lower internationally. If trade tensions escalate further, slower manufacturing activity could continue to pressure commodity prices.
One of the hardest-hit areas has been agriculture. Retaliatory tariffs from countries like China have reduced demand for U.S. farm products. Soybean exports, for example, have seen a dramatic decline, leading to lower prices for American farmers. The impact extends beyond crops—industries that support agriculture, such as farm equipment manufacturers, have also been affected.
Oil markets have seen increased volatility as tariffs raise concerns about slower global economic growth, which could reduce energy demand. At the same time, U.S. tariffs on imported energy products (such as oil and natural gas) could disrupt supply chains, leading to price swings.
Investor Takeaway
For investors in commodities, price trends will depend on how trade negotiations unfold. If tensions ease, agricultural and industrial commodity prices could rebound. On the other hand, prolonged trade disputes could continue to pressure demand and keep prices volatile.
Fixed Income: Why Are Bond Yields Dropping?
During periods of uncertainty, investors often seek safer assets, such as U.S. Treasury bonds. This increased demand for bonds pushes prices up and yields down. When major tariff announcements occur, we often see a dip in Treasury yields, signaling that investors are moving away from riskier assets like stocks.
Corporate Bonds and Credit Spreads
While government bonds have benefited from the flight to safety, corporate bonds—especially lower-rated ones—have seen increased risk premiums. Investors are demanding higher yields to compensate for potential economic slowdowns that tariffs might trigger. Investment-grade bonds remain relatively stable, while high-yield bonds have seen spreads widen, reflecting concerns about slower growth affecting companies with weaker financials. However, spreads remain very tight compared to longer term averages as balance sheets are much healthier today than in growth scares of the past.
Federal Reserve’s Role
The Federal Reserve has signaled that trade uncertainty is a key factor in interest rate decisions. In 2019, the Fed adjusted its policy stance, cutting rates partly in response to tariff-related economic risks. If tariffs continue to impact growth, the Fed could step in with further rate cuts, which may help support bond markets but could also mean lower returns for savers.
Investor Takeaway
For investors looking to reduce risk, government bonds have historically provided stability during volatile periods. However, lower yields mean returns on fixed-income investments are also declining. Those holding corporate bonds should watch credit spreads, as they reflect investor sentiment on economic conditions.
Market Expectations Moving Forward
Best Case Scenario: A trade resolution leads to lower tariffs, renewed business confidence, and a rebound in affected sectors. This would likely bring a stock market rally and improved earnings outlooks.
Worst Case Scenario: A prolonged or escalating trade war could lead to slower global economic growth, continued volatility, and weaker corporate profits. This would keep pressure on equities while supporting safe-haven assets like bonds and gold.
Central Bank Influence: If tariffs weaken economic growth, the Federal Reserve may cut interest rates further, which would be supportive for bonds but could create challenges for income-focused investors.
How Investors Can Navigate Tariff-Driven Markets
Current trade tensions have led to higher market volatility, and investors should be prepared for continued fluctuations. However, history suggests that markets eventually adjust to trade disruptions, particularly if negotiations lead to a resolution.
Key Investment Takeaways
✔ Stay Diversified – Having a mix of assets (stocks, bonds, commodities) can help manage risk in uncertain times.
✔ Focus on Fundamentals – While markets react sharply to headlines, long-term investors should focus on company and economic fundamentals.
✔ Be Selective in Risk Exposure – Consider reducing exposure to sectors directly impacted by tariffs while looking for opportunities in areas that remain resilient.
✔ Monitor Policy Developments – Tariff negotiations and Federal Reserve policy decisions will be key drivers of market trends.
Ultimately, investors who maintain a balanced approach and avoid reacting emotionally to short-term swings will be in a stronger position to weather the market turbulence and capitalize on future opportunities. As always, if you have any questions, please don’t hesitate to reach out to your financial advisor.
-The Seventy2 Capital Team
Commentary and Research provided by:
Michael Levitsky, CFA®, CAIA® – Managing Director, Investment Strategy