On April 2nd, the Trump administration announced broad new tariffs[1] on imports to the U.S. The tariff rates were more aggressive than most investors expected, causing a significant response from the markets. The S&P 500 declined by (4.8)% and the U.S. dollar fell by more than (2)%. Bonds provided some diversification, with the Aggregate bond index up by ~0.6%.

Potential Impacts

• If economists input these tariffs into a general model[2] of the economy, the output implies negative impacts on growth and upward pressure on prices.

• Corporate earnings would suffer if the economy slows and input costs rise.

• The longer tariff policy weighs on consumer and corporate spending, the greater the risk of a recession.

• Investors from outside the U.S. have built significant positions in U.S. equities over years and decades. A shift in those allocations away from the U.S. would pressure U.S. equity prices and boost equity prices in other countries.

Tariff Wars?

How long these tariffs remain in place is unknown, but the president’s suggestion that their impact will require a “transitionary period” implies the administration is committed to them for at least the next few months.

In the meantime, President Trump is known for the “art of the deal.” One possible explanation for the magnitude contained in this week’s announcement is that the administration took a harsher approach up front so that they have the greatest leverage heading into the negotiations phase of the “tariff wars.” That aggressive approach risks retaliatory responses and countries banding together in oppositional blocks. The logic supporting it presumes most of those countries ultimately can’t afford to lose access to the U.S. consumer. The multi-trillion-dollar question is whether that incentive is enough to bring everyone to the table. If negotiations lead to a series of deals that reduce tariffs from these proposed levels, markets will likely react favorably. If negotiations are less fruitful and tariffs remain in place for an extended period, the risks to the global economy are significant.

Parting Thoughts

In this environment, it’s worth remembering that the long-term return expectations embedded in our Investment Policy Statements are designed to include significant annual variations from both buoyant market periods (like 2023 and 2024) and challenging markets (like 2022) alike. We do not believe volatility in markets is the same thing as risk. Instead, permanent loss of capital is what we strive to avoid, and fluctuating stock and bond prices often create opportunities we try to seize.

We have positioned our client asset allocations to play from a position of strength. We continue to actively review account positioning, and we feel confident a combination of high-quality fixed income, hedged equity, and other strategies provide capacity to take advantage of market dislocations.

As markets stand today[3], from a high-level perspective not much has happened. Stocks are down ~(12)% from a recent all-time high[4], and ~(8)% YTD[5]. At the same time, bonds[6] have gained ~3.5% YTD. Since our portfolios typically contain both stock and bond allocations, blended performance should exceed the YTD results in the stock market. From these levels, we suspect that a further ~(10)% decline would begin to yield attractive opportunities we would look to capitalize on.

We greatly appreciate your trust. If you have any questions or want to discuss anything in greater detail, please feel free to reach out.

- Kovitz Investment Team

1 These include 10% baseline tariffs on all imports starting April 5th and reciprocal tariffs of 34% on China, 20% on the EU, 24% on Japan, 46% on Vietnam, 32% on Taiwan, and 25% on South Korea starting April 9th.

2 These models typically assume that nothing changes except the input variables. Clearly, this is not the way complex economies work.

3 April 3, 2025

4 S&P 500 high reached on February 19, 2025.

5 YTD is year-to-date.

6 Bloomberg U.S. Aggregate Bond Index

Disclosures

Definition of the Firm: Kovitz Investment Group Partners, LLC (Kovitz) is an investment adviser registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940 that provides investment management services to individual and institutional clients. From October 1, 2003 to December 31, 2015, the Firm was defined as Kovitz Investment Group, LLC. Effective January 1, 2016, Kovitz Investment Group, LLC underwent an organizational change and all persons responsible for portfolio management became employees of Kovitz. From January 1, 1997 to September 30, 2003, all persons responsible for portfolio management comprised the Kovitz Group, an independent division of Rothschild Investment Corp (Rothschild).

The description of products, services, and performance results contained herein is not an offering or a solicitation of any kind. Past performance is not an indication of future results. Securities investments are subject to risk and may lose value.