Tariff turn
- US tariffs on Mexico, Canada, China started Tuesday
- S&P 500 hit three-month low, then rebounded
- Economic, market implications still in doubt
“Policy uncertainty” has been a much-referenced phrase in market circles since the Trump administration signaled its intent to revamp immigration, trade, and the Federal workforce.
This week traders and investors watched stocks retreat to their lowest levels of the year as previously announced tariffs on Mexico, Canada, and China went into effect. On Tuesday the S&P 500 (SPX) dropped to its lowest level since early November—briefly falling below the lower boundary of its multi-month consolidation in the process—before trimming its losses modestly:
Source: Power E*TRADE. (For illustrative purposes. Not a recommendation. Note: it is not possible to invest in an index.)
At Tuesday’s low, the SPX was down 6.7% from its February 19 record close, making it the index’s biggest pullback since a 9.7% retreat last July-August. The Cboe Volatility Index (VIX) hit its highest level of the year before easing as the market rebounded.
Such volatility isn’t necessarily surprising. There’s a great deal of uncertainty surrounding tariffs, not least of which because they can be implemented, adjusted, or canceled at any time. The Mexico and Canada tariffs that started on Tuesday, for example, were originally announced on February 1, quickly “postponed” to March 4, and reconfirmed last Thursday. The market’s gyrations around the various announcements highlights the potential short-term repercussions of such uncertainty.
There’s also a wide range of opinions about the longer-term economic and market implications of tariffs. But there are certain principles traders and investors may want to keep in mind—namely, that US consumers will pay for tariffs, and that tariffs have the potential to lead to rising inflation and slower economic growth.
In a recent roundtable, for example, Morgan Stanley Wealth Management strategists noted that while tariffs may raise revenues for the US, they will also get “passed through”—i.e., consumers will pay for them in the form of higher prices for goods and services.1 If that translates into a broad, sustained inflation increase, the current higher-for-longer interest rate picture will likely be in place for the foreseeable future.
Meanwhile, Morgan Stanley & Co. analysts noted that even if tariffs are successful in bringing businesses operating abroad back to US shores—one of the Trump administration’s stated goals—there’s a cost to the transition (in the form of supply chain realignment and other complications) that could pressure corporate margins and challenge economic growth.2 And because of the potential for something to “go wrong,” such as escalating tariffs or broader geopolitical conflict, they think investors may want to consider leaning more heavily into bonds, especially in a slowing-growth scenario.
On a related note, the Morgan Stanley Wealth Management analysts also felt that both immigration policy and efforts to trim the Federal workforce were likely to show up in lower payroll totals in the monthly jobs report. However, the analysts described the probable net effect to be a labor market “slowdown” rather than a collapse.3
A final note: The market’s partial intraday rebound on Tuesday underscored another short-term dynamic that could play out—a twist on the trading axiom “buy the rumor, sell the news.” The bearishness surrounding a potential tariff may ease, at least temporarily, when that tariff becomes a reality. In other words, traders and investors should consider the possibility that the market’s recent volatility isn’t going away anytime soon.
Market Mover Update: On Tuesday April WTI crude oil futures (CLJ5) fell 2.5% intraday to $66.77—their lowest low since December 9—but rallied to close in the upper half of the day’s range.
Today’s numbers include (all times ET): mortgage applications (7 a.m.), ADP Private Employment Report (8:15 a.m.), S&P Global Services PMI (9:45 a.m.), ISM Services Index (10 a.m.), factory orders (10 a.m.), EIA Petroleum Status Report (10:30 a.m.), Beige Book (2 p.m.).
Today’s earnings include: Abercrombie & Fitch (ANF), Foot Locker (FL), REV Group (REVG), Thor Industries (THO), MongoDB (MDB), Marvell Technology (MRVL), Zscaler (ZS).
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1,3 MorganStanley.com. U.S. Policy Pulse: Trump 2.0 and the Markets. 2/25/25.
2 MorganStanley.com. Searching for Signals in U.S. Policy Noise. 2/28/25.