SPECIAL REPORT
Navigating Market Volatility:
Understanding the New Tariff Landscape
From the desk of Dr. Ron A. Rhoades, CFP® of Scholar Financial, a member of XY Investment Solutions, LLC, a fee-only, fiduciary SEC-registered investment advisory firm
April 5, 2025
In times of significant economic policy shifts, I believe it is essential to provide you with timely insights and perspective. This past week, President Trump announced sweeping changes to America’s trade policy that have sent ripples through global markets. Today, I want to share my preliminary analysis of these developments, their potential impacts on the economy and your investments, and most importantly, what this means for your financial future.
The New Tariff Framework: What Has Changed
On April 2, 2025—which President Trump termed “Liberation Day”—the Trump administration announced a fundamental restructuring of U.S. trade policy centered around two major components:
- Universal Baseline Tariff: A 10% tariff on imports from all countries, which took effect on April 5, 2025, at 12:01 a.m. EDT.1 This represents a dramatic shift from the previous average U.S. tariff rate of approximately 2.5% in 2024. The average effective US tariff rate after incorporating all 2025 tariffs is now 22 ½%, the highest since 1909.2
- Reciprocal Tariffs: Higher individualized tariffs targeting nations with which the U.S. has trade deficits, with rates varying significantly by country. These are scheduled to take effect on April 9, 2025. For example, imports from China will face a 34% rate (in addition to the 20% already in place), the European Union 20%, and Japan 24%.3
- A Few Exemptions. There are some exemptions to the 10% tariff: Goods from Canada and Mexico that are compliant with the U.S.-Mexico-Canada Agreement will not see a rise in tariffs.4
The Administration has framed these tariffs as an emergency necessary to “ensure fair trade, protect American workers, and reduce the trade deficit.”5
The Short-Term Market Reaction
The immediate market response has been pronounced, with major U.S. indices experiencing significant declines. The CRSP U.S. Market Index, a market capitalization-weighted index of all U.S. stocks publicly traded on the major exchanges, is down 9% over the past five days (as of April 4, 2025 market close), and over 14% since the first of the year (as of April 5, 2025 market close) (per MarketWatch.com).
Foreign stocks suffered, as well, over the past two trading days. For example, while the Dimensional Funds Large Cap International Portfolio, which includes large foreign developed markets stocks, was up about 7% during the first quarter of 2025, those gains were wiped out completely on April 3rd and 4th. Emerging markets stocks also fell, with the Dimensional Emerging Markets Portfolio now enduring a -3.07% return for the year-to-date (as of market close on April 4th).6
Interest rates for U.S. Treasury securities generally fell broadly on April 3rd and 4th, reflecting the heightened fears of a recession and a “flight to safety.” Bond values generally rose as bond yields on average declined on April 3rd and 4th. For example, the price of the Vanguard Total Bond Market Index Fund Admiral Shares rose from $9.67 as of April 2, 2025 close to $9.73 as of the April 4, 2025 close – a 0.62% increase in value over two days.
Economic Implications and Concerns
Concerns About Higher Inflation in the U.S.
Many economists anticipate the new tariffs will exert upward pressure on consumer prices. According to Bill Adams, chief economist for Comerica Bank, the tariffs could potentially cause a 3-5% increase in inflation over the next 18 months beyond what would have occurred otherwise.7 The Consumer Price Index (CPI) rose 2.8% in February from the 12 months prior.8
Increased Risk of Recession In the U.S.
The combination of higher inflation and slower economic growth has raised concerns about stagflation—a particularly challenging economic environment characterized by rising prices alongside stagnant economic growth. The Yale Budget Lab estimates that the tariffs announced to date could reduce U.S. real GDP growth (a measure of the growth of the U.S. economy) by 0.9 percentage points in calendar year 2025.9
As GMU professor and economist Tyler Cowen recently wrote: “[We] will be moving into a future with higher prices, less product choice, and much weaker foreign alliances. The tanking of the stock market, and other possible asset price repercussions, may tip America into recession and increase joblessness.”10 JPMorgan analysts have increased their probability of a U.S. recession this year from 40% to 60% following the tariff announcement.11
However, some economists still believe the economy will likely expand. As Bill Adams of Comerica Bank stated: “A recession over the next 12 months looks more likely than it looked at the start of the year, but we still think the economy will most likely expand in 2025, and 2026 in particular, because it looks likely that the administration will use tax revenues from tariffs to partially fund broader tax cuts that will come into effect next year.”12
Global Economic Impact
The ripple effects of these tariffs extend beyond U.S. borders. The impact on national economies will vary widely based on their trade relationship with the U.S. Many trading partners are considering retaliatory measures, which could further complicate the global economic picture and potentially trigger a broader trade war. For example, China stated on April 4th that it will impose reciprocal 34% tariffs on all imports from the United States from April 10, 2025.13
Federal Reserve Implications: Stagflation?
The Federal Reserve Bank now faces a challenging policy dilemma. With tariffs potentially pushing inflation higher while simultaneously slowing economic growth, the central bank may need to postpone anticipated interest rate cuts.
Stagflation—the combination of slow economic growth, high unemployment, and high inflation—represents a significant economic risk that could potentially emerge from the Trump administration’s tariff policies. Stagflation presents the Federal Reserve with the dilemma – either lower interest rates to stimulate the economy (at the risk of greater inflation), or increase interest rates to tame inflation (as the risk of further economic decline). It is too early to conclude that stagflation will occur, but at present it is of higher concern.
The Impact of Recent Market Movements on Expected 10-Year Asset Class Returns
Research Affiliates, an investment firm, provides monthly updates to the expected returns of various asset classes. The chart below shows the firm’s projections of expected returns for select asset classes as of March 31, 2025.
Past performance is not a guarantee of future returns. The projected returns above are not guaranteed. There is a possibility that the average annualized returns for any of the asset classes over the next 10 years will fall below or above the range of returns shown. The foregoing data assumes reversion to the mean of asset class valuations by the end of the 10-year period; the mean asset class valuation for any asset class can only be estimated and cannot be known with certainty, and mean asset class valuations can change over time. The data is derived from Research Affiliates’ “Asset Allocation Interactive” tool, available online. The asset class return data shown uses asset classes as defined by Research Affiliates. The asset class returns do not reflect any deduction for the fees and costs of implementation by a mutual fund, nor for the investment advisory fees charged by XY Investment Solutions, LLC.
Different mutual fund and ETF managers (investment advisers) define and construct asset classes in different fashions, and hence the above asset class data, while informative, is not necessarily reflective of the expected returns of any specific mutual fund or ETF; greater tilts toward factors, the addition or subtraction of additional factors, and other fund design characteristics and management techniques would result in different expected returns data. The foregoing data is derived utilizing the RA Capital Market Expectations Methodology.
Generally, when asset class valuations fall (as most stock asset classes fell on April 3rd and 4th, by about 10% on average), expected returns for those asset classes rise over the next ten years.14 However, since broad stock market asset class returns are driven, over the long term, by positive economic growth, the decline in global economic growth – should it occur – may partially or fully offset any anticipated rise in expected 10-year returns due to valuation changes.
A Strategic Perspective
Looking beyond immediate market reactions, several strategic questions emerge. In essence, to what extent are these tariffs “permanent”?
- Reshoring Potential? While disruptive in the short term, these policies aim to encourage domestic manufacturing and reduce dependence on foreign supply chains. Companies that successfully adapt to this new environment may emerge stronger and more resilient. Yet, in some instances, it may take years to establish new supply chains reliant on domestic manufacturers.
- Negotiation Leverage? The Trump administration has suggested these tariffs serve as a starting point for negotiations rather than a final policy stance. The threat of increased tariffs—or the promise of their reduction—creates significant leverage in future trade discussions.
Action by Congress? Public Pressure? Past reversals of tariff policies have rapidly occurred under the Trump administration. If widespread negative impacts are felt, pressure may arise from the U.S. Congress and from the public to reverse these tariffs, or reduce them.
What This Means for Your Portfolio
In today’s market environment, a disciplined investment approach based upon academic evidence becomes even more valuable. Here’s how most of our clients’ portfolio are positioned:
Strategic Factor Diversification: Your portfolio leverages the Fama-French 6-Factor approach, systematically targeting equity premiums beyond market beta, including value, size, profitability, investment, and momentum factors. This evidence-based methodology helps capture returns from historically rewarded dimensions of risk.
By way of further explanation, in 1992 and 1993, Eugene Fama and Kenneth French published groundbreaking papers15 introducing their three-factor model, which explains that stock returns are primarily driven by:
- Market risk: How much a stock moves relative to the overall market;
- Size: Small stocks versus large stocks;
- Value: Stocks with high book value relative to market price versus those with low book value relative to market price;
Later research expanded this to include additional factors like profitability16 and investment patterns17 and momentum.18 The current Fama-French six-factor model explains about 85% to 93% of a diversified portfolio’s return.19
Global Value Opportunity: With a significant allocation to international equities, some of our clients possess portfolios positioned to potentially benefit from relative valuation disparities between U.S. and foreign markets, as indicated in the previous chart. Current valuations suggest enhanced return potential in many overseas markets compared to domestic counterparts.
A Disciplined Approach to Rebalancing: We continuously monitor for rebalancing opportunities created by market dislocations, enabling systematic “buy low, sell high” execution. Should rebalancing thresholds be obtained, rebalancing of your portfolio (which typically occurs quarterly) can occur within the quarter, again.
Rebalancing means periodically adjusting your portfolio back to its target allocation. This disciplined approach helps maintain your desired risk level.20
A 2012 paper by Bouchey and colleagues21 explored “volatility harvesting”—the process of capturing additional returns through rebalancing. When you rebalance, you’re essentially selling investments that have performed well (selling high) and buying those that have underperformed (buying low). This process takes advantage of price fluctuations and can enhance portfolio performance over time.22
Looking Forward
While no one can predict exactly how markets and the economy will evolve in response to these policy changes, history teaches us that markets eventually adjust to new realities.
The U.S. economy has consistently demonstrated remarkable resilience through various economic cycles, recessions, and global disruptions. This resilience stems from several key characteristics and capabilities that American companies have cultivated over time.
For example, the U.S. economy benefits from extraordinary diversification across sectors, from technology and manufacturing to services and energy. This diversity provides natural hedges against sector-specific shocks, allowing the broader economy to maintain stability even when individual sectors face challenges.
In today’s rapidly changing business environment, competitive advantage increasingly comes from organizational capabilities that foster rapid adaptation. Instead of excellence in specific activities, successful U.S. companies have become really good at learning how to do new things. They have developed systems to experiment rapidly with products, services, business models, and strategies.
The U.S. also possesses well-established legal frameworks, capital markets, and financial systems that enable businesses to access capital, restructure when necessary, and recover from setbacks more effectively than in many other economies.
This is not to say that the tariffs – especially if they persist for a long period of time – won’t be disruptive to the U.S. economy.
But new and unexpected developments, as we have seen, can occur at any time. A disciplined approach, employing strategic asset allocation, and evidence-based investing, is an academic-supported approach that can provide substantial benefits. Occasional stock market downturns have occurred – and will occur in the future. At times these downturns can be abrupt and/or severe. One key to investment success is to understand that planning for such downturns has already occurred – months ago, and years ago – via the adoption of a sound investment policy.
I remain committed to closely monitoring these developments and making thoughtful adjustments to your investment strategy as warranted. As always, I encourage you to reach out with any questions or concerns about your specific financial situation.
Thank you for your continued trust and confidence.
– Ron
1 “Trump Tariffs Take Effect,” The Wall Street Journal (April 5, 2025).
2 “Where We Stand: The Fiscal, Economic, and Distributional Effects of All U.S. Tariffs Enacted in 2025 Through April 2,” The Budget Lab, Yale University (April 2, 2025).
3 Robert Schroeder, “Trump’s 10% tariffs kick in today. Why the biggest ones are yet to come.” MarketWatch (April 5, 2025).
4 Robert Schroeder, “Trump’s 10% tariffs kick in today. Why the biggest ones are yet to come.” MarketWatch (April 5, 2025).
5 Fact Sheet: President Donald J. Trump Declares National Emergency to Increase our Competitive Edge, Protect our Sovereignty, and Strengthen our National and Economic Security (April 2, 2025), also stating: “These tariffs adjust for the unfairness of ongoing international trade practices, balance our chronic goods trade deficit, provide an incentive for re-shoring production to the United States, and provide our foreign trading partners with an opportunity to rebalance their trade relationships with the United States.”
6 Dimensional Funds Advisors, data derived from adviser web site (retrieved April 5, 2025).
7 Ryan Ermry, “Higher inflation, shaky markets: What to expect from Trump’s tariff policies, according to economists,” CNBC (April 3, 2025).
8 Rob Wile, “Price growth cooled more than expected in February, before Trump ramped up tariffs,” NBCNews (March 12, 2025).
9 “Where We Stand: The Fiscal, Economic, and Distributional Effects of All U.S. Tariffs Enacted in 2025 Through April 2,” The Budget Lab, Yale University (April 2, 2025).
10 Tyler Cowen, “Yours truly on the Trump tariffs,” Marginal Revolution (economist blog) (April 3, 2025).
11 Siddarth S, “Global brokerages raise recession odds; J.P.Morgan sees 60% chance,” Reuters (April 5, 2025).
12 Ryan Ermry, “Higher inflation, shaky markets: What to expect from Trump’s tariff policies, according to economists,” CNBC (April 3, 2025).
13 Juliana Liu and Nectar Gan, “China imposes 34% reciprocal tariffs on imports of US goods in retaliation for Trump’s trade war,” CNN (April 4, 2025).
14 See, e.g., “Below-Average Returns Over the Next Decade?”, ValueWalk (Sept. 25, 2021): According to research by Ed Easterling at Crestmont Research, stock market returns are likely to be very low over the next 10 years when starting from high valuations, while periods starting with below-average (cheap) valuations tend to produce above-average returns. Easterling notes that “one thing that the above-average returns group has in common, is they start with below-average (cheap) valuations. And the below-average returns group? You guessed it: they start with above-average (expensive) valuations.”
15 Fama, E. F., & French, K. R. (1992). The Cross‐Section of Expected Stock Returns. The Journal of Finance, 47(2), 427-465; Fama, E. F., & French, K. R. (1993). Common risk factors in the returns on stocks and bonds. Journal of Financial Economics, 33(1), 3-56.
16 Novy-Marx, R., 2013 “The Other Side of Value: The Gross Profitability Premium”. Journal of Financial Economics, Vol 108, No. 1, pp. 1-28; Fama, E.F., and French, K.R., 2015. A Five-Factor Asset Pricing Model. Journal of Financial Economics, 116(1), pp. 1-22.
17 The investment factor appears to have first been noted by Titman, S., Wei, K. J., & Xie, F. (2004). Capital investments and stock returns. Journal of Finance, 59(6), 1639-1665.
18 Key papers on the momentum factor include:
- Jegadeesh and Titman (1993): This seminal paper, titled “Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency,” is considered the foundation of momentum research. The authors document that past winners tend to outperform past losers, challenging the efficient market hypothesis ¹ ².
- Jegadeesh and Titman (2001): In their follow-up paper, “Profitability of Momentum Strategies: An Evaluation of Alternative Explanations,” the authors examine various explanations for the momentum effect, including risk-based and behavioral factors.
- Carhart (1997): Mark Carhart’s paper, “On Persistence in Mutual Fund Performance,” introduces the momentum factor as a key component of a four-factor model, which also includes market, size, and value factors.
- Asness, Moskowitz, and Pedersen (2013): This paper, “Value and Momentum Everywhere,” documents the presence of momentum in various asset classes, including stocks, bonds, and commodities.
- Barroso and Santa-Clara (2015): The authors of “Momentum and the Cross-Section of Stock Returns” examine the relationship between momentum and stock returns, finding that momentum is a significant predictor of future returns.
19 Fama, E. F., & French, K. R. (2018). Choosing factors. Journal of Financial Economics, 128(2), 257-279.
20 Vanguard Research (2015). “The Global Case for Strategic Asset Allocation (and a Disciplined Rebalancing Approach).”
21 Bouchey, P., Nemtchinov, V., Paulsen, A., Stein, D.M., 2012. Volatility Harvesting: Why Does Diversification Work? Investments & Wealth Monitor, Sep/Oct, pp. 19-25.
22 Constantinides, G. M. (1979). A theory of the optimal timing of portfolio adjustments. Journal of Finance, 34(4), 851-866. See also Fernandez-Perez, A., Frijns, B., & Tourani-Rad, A. (2017). The rebalancing premium. Journal of Financial Economics, 125(2), 333-347. See also Moreno, M., & Navas, J. F. (2017). Rebalancing strategies for portfolio optimization. Journal of Economic Dynamics and Control, 75, 131-145.
23 See, e.g., Martin Reeves and Mike Deimler, “Adaptability: The New Competitive Advantage,” Harvard Business Review (July-August 2011).
