What We're Seeing: Tariff Shock – 3 March 2025

The Week in Brief

Political risk resurfaced with a vengeance. US equities fell sharply on Monday after President Trump announced 25% tariffs on Canada and Mexico. The S&P 500 dropped 1 to 2% in a single session, with growth stocks sold more aggressively than value.

The announcement caught markets off guard. While tariff threats had been part of the political discourse, the speed and scope of the implementation surprised investors. Supply chains for autos, agriculture, and consumer goods face immediate disruption.

Market Reaction

The initial response was a classic flight to safety. Bond yields briefly dropped as investors sought shelter. The dollar rallied on haven demand. Equity volatility spiked, with the VIX jumping to its highest level in months.

By week’s end, indices recovered somewhat. Markets began to price in the possibility of negotiation or delay, and some of the initial panic subsided. But the episode left a mark on sentiment.

Sector Impact

Trade-sensitive sectors bore the brunt. Autos, industrials, and retailers with significant cross-border exposure fell hardest. Energy held up relatively well, as oil prices remained firm despite the uncertainty.

Growth stocks were hit harder than value, reflecting their higher duration and sensitivity to discount rate volatility. When uncertainty rises, investors tend to de-risk by selling their highest-beta holdings first.

Our Read

Tariffs are a tax on trade, and by extension, on growth. The direct impact is higher input costs for manufacturers and higher prices for consumers. The indirect impact is uncertainty, which can delay investment and hiring decisions.

We think the market reaction was reasonable. This is a meaningful policy shift that creates real economic headwinds. The question is whether it represents a new normal or a negotiating tactic.

Our base case is that some form of resolution or delay emerges. The costs of a prolonged trade war with Canada and Mexico are significant for all parties. But we cannot dismiss the tail risk that tensions escalate.

For positioning, we have modestly reduced exposure to trade-sensitive names and added to domestic-focused companies. Quality remains our guiding principle: companies with pricing power and resilient demand are better positioned to weather uncertainty.

What Could Change Our View

Swift resolution of the tariff dispute would be bullish. If the administration walks back the measures or carves out key industries, markets would likely rally. Conversely, escalation to other trading partners or retaliatory measures would be concerning. We are watching trade headlines closely.

This is informational commentary, not investment advice.