Market Outlook

Making Sense

Tariff & Trade Policy Market Update

April 4, 2025, 2:00 pm ET

Amy: Hi, I'm Amy Thomas, a strategist here at First Citizens Bank. On Friday, April 4th, 2025, our Chief Investment Officer Brent Ciliano and Director of Market and Economic Research Phil Neuhart sat down to talk about some of the things that happened in the markets and the economy.

As a reminder, the information you're about to hear are the views and opinions of only the authors at the time of recording and should be considered for educational purposes only. None of this information should be considered as tax, legal or investment advice.

Brent: Thank you, Amy, and good afternoon, everyone. I hope all of you are well. Given the recent market volatility brought on by global trade tensions, Phil and I thought it was both appropriate and timely to give you an update on what's going on. We're going to break it down into three parts.

The first is what actually happened and what's transpired with global trade talks and tariffs broadly. Then we're going to talk about the market's reaction function and what's happened. And then lastly, how should you be thinking about all this, and what might you actually do about what's going on? So let's jump in and let's talk about US trade policy and what was announced. And I think, Phil, before we do that, let's start where were we before any of the talks as it relates to tariffs. So last year, the trade policy for the US, on average, effective tariff rates on US imports was roughly about 2.5% baseline on all imports. And there were some country-by-country specific tariffs—so think China specifically upwards of 11%. But broadly, the US was not actively negotiating tariff rates with countries.

The total aggregate revenue brought on by that tariff rate of about 2.5% based on 2024 imports was roughly about $82 billion, or about 0.3% of US GDP.

Phil: Right. So if we look now to post the recent tariff announcement, where are we now? First, we're roughly at 23% average tariff rate on US imports. Now this is an estimate. The reason is it assumes imports from last year. Of course, imports could change now, given the change in the tariff rates. But no matter how you slice it, of course, a material increase in tariff rates.

That includes a 10% baseline on all imports except Canada and Mexico. That's important. That is quite a shift. And then country-by-country tariffs on top. This affects most of our major trade partners—for example, 50% roughly all-in for China. So we are seeing material increase in tariffs.

We shall see in terms of this is a negotiation or not. There's always mixed signals there. But, of course, this is where we stand today. If you take that 23% and you multiply by imports—$750 billion in tax revenue. Of course, that's an estimate as well because it assumes a lot of other things. But if that estimate holds, that is roughly 2.4% of GDP. Definitely not a small number. Actually, in fact quite a large number in terms of tariff revenue.

Brent: Well, I know we've had a lot of conversations with clients over the last couple days as things have been volatile. What we thought made sense was to sort of take a huge step back and give all of you a historical perspective on tariffs and trade policy throughout the US's history. So, Phil, we really have to break down this this chart into three parts. The first, I want to start with—where are we today from a perspective.

You can see, as you just highlighted, at 23% effective tariff rate. That puts us all the way back to effectively 1910 as it relates to the total weighted average effective tariff rate. And when you think about where we've been, that first period of time is—think about the formation of our country from roughly 1780 all the way through about 1862 or the Civil War—we didn't have a federal income tax, so tariffs were a primary source of revenue for our nation.

Then you had the Civil War, Abraham Lincoln in 1862 started to have some semblance of income tax to kind of pay back for the cost of the Civil War. But it wasn't really until the 16th Amendment in 1913 where we formalized the federal income tax. So the period of—think Civil War all the way through World War II—we use tariffs predominantly for national security. It was a significant part of the Industrial Revolution, as it relates to growing industry in our country. It was also used for protective measures as well. And that, combined with the start of federal income tax, was a big component of US revenues.

Post-World War II—so think, you know, effectively 1940-ish all the way to now—we've moved to a more broad global trade environment, more liberalization of trade policy, and tariffs have not really played an effective role. So this is a significant change relative to where we've been going back some time.

Phil: Absolutely. And you can of course see the pink line, just how elevated that is really through memory. I mean, we're talking a 100-year event.

When we talk about impacts, of course, that's why it's very hard to estimate. This is not a place we have been as an economy in quite some time.

Brent: That's right.

Phil: So when you look at US trade policy, where do we go from here? I mean, we want to talk different optimistic and pessimistic scenarios, a T chart here. I'll take the optimistic side. Thank you for letting me do that, Brent.

Brent: You're welcome.

Phil: So what is the optimistic scenario and something that, of course, you're cheering for if you watch markets? One, trade partners are open to negotiations with the US, right? And that's something we see some early indications of. Do we see that en masse? And importantly, with important trade partners, big trade partners, is where it would be very important.

Inflation remains reasonably under control. This remains very unknowable. We get consumer price data in a few days here, but that is trailing, right? We don't really know what's going to happen with inflation, but does it remain reasonably under control? That would be great.

Firms and consumers can substitute tariff goods. You know, if a firm is importing a good that is also made in the US and input into their process, can they substitute for a US good? That, of course, would be possible. Or in the cases where there's one-off country tariffs, a country that has lower tariffs as well.

Domestic demand remains firm. Of course, we know that consumer sentiment surveys, et cetera, have faltered, but demand—hopefully, that remains firm. That would be optimistic.

And then companies modify supply chains to manage cost, as we already pointed to. If you're able to, can companies act in a dynamic manner to adjust their supply chains in the near term versus just long-term outcomes?

Brent: So if we're looking at the pessimistic scenario, hopefully, that we don't we don't get to that. To your point, we have our key and major trading partners are either unwilling to negotiate or significantly delay those negotiations, which hurts our economy as it relates to growth and certainly prices.

And as you just mentioned, a byproduct of tariffs being potentially higher—or at the rate that was announced—combined with potentially delaying the time to which we would negotiate, we could see prices across the board rise sharply. We are already at a pretty significantly high point for inflation already with CPI and core PCE running in about 2.8%.

As it relates to substitutions, for consumers but also for corporations, having substitutes may or may not be an easy thing to do. And even if it is something that could be done, it might take time for those substitutions to actually kick in.

And when we think about, you know, higher prices and ultimately the uncertainty and how that might weigh on demand, right? We talked about this in our last webinar. Middle-income, low-income consumers have already been stretched as it relates to spending. Will higher prices potentially be a negative impact to consumption, which obviously—as we've talked about before—is about 68% of US real GDP. So if demand slows because prices are higher, that would certainly slow growth expectations in our economy.

And as you just talked about with companies, while they might be able to think about modifying supply chains, you don't do that overnight, and it might take time for companies to change those supply chains. And then raise prices as well off the back of that.

Phil: That's right. And then, of course, there's margin impact there as well. So let's talk about the Fed, something we're always watching carefully. The Fed is a little bit between a rock and a hard place, right? We have inflation that's running above their target even before tariffs and potentially slowing US growth. So they're taking a wait-and-see approach. But if you look at futures, we have seen a move towards more cuts this year.

So before the recent announcements, roughly three cuts were priced in between now and the end of 2025. That is now four-ish cuts. So another cut coming in, and you can see that dark blue line versus the light blue line, a shift down sooner. Some cuts are being pulled forward more as well.

So the idea would be that the Fed would cut. We did have recent comments from from Chairman Powell. It does appear that they are, though, in a wait-and-see mode. They want to see how this plays out. So does not necessarily mean they're cutting rapidly unless something were to break, and of course, then they will act much more quickly.

Brent: In the broader implications of the market's repricing risk, but also pricing in the potential for a recession. And, you know, so far many economists and market participants have changed their expectations on where or whether we're going to have a recession over the next 12 months. And the probability of recession has been sort of all over the board as far as probability.

And so I think we're going to really have to wait and see—from our lens, certainly—if the pessimistic scenario were to play out like we just covered, there's no mistaking that the probability of a recession over the next 12 months will increase. The $64,000 question is how long do tariffs stay on? Do they escalate? Which would ultimately drive that probability of recession. Too much uncertainty right now to tell.

Phil: Absolutely.

Brent: So let's transition and talk about the impact on markets. I would say across the board, we've seen equity markets react very significantly to global trade tensions.

To update this on the fly, for example, right through April 4th at about 2 pm, US equity markets are now down about 17% from the market's high back on February 19th until that time I just quoted. And, you know, year to date down about 13%.

International markets that had been relatively stable and resilient and had outperformed US equity markets are now down about 7.5% through Friday, April 4th, at about 2 pm. Again, we're starting to see markets move pretty significantly. It's hard to keep up with these numbers, but I think the broad takeaway is that equity markets are reacting negatively to global trade tensions.

On the other side of it, why we have fixed income in the portfolio, fixed income and specifically taxable bonds have held up relatively well. And again, on the fly, up almost about 3% through April 4th, and year to date up almost about 4%. Municipal bonds have held in there, basically being flat. So again, the counterbalance in portfolios between stocks and bonds is certainly helping in this volatile time.

Phil: Yeah. If you look back at our 2025 outlook, something we've highlighted is, we really did think this is going to be a choppy year. Of course, it's choppier than anyone expected, but there was a lot of policy uncertainty coming into the year, and large-cap stocks were priced to perfection. We did expect lower market returns for the next decade than last and really emphasized portfolio balance.

So we do think that the yield in fixed income is something to emphasize. And it's something that we get tired of saying. You probably get tired of hearing, but it's time in markets that matters, it's not timing markets—really pays off in the long run, something we can talk about more in a moment.

As we flip ahead, the S&P 500, here we're showing since January of 2022. Remember, we had that 25% selldown in 2022, which seems like a long time ago now. We had a pretty nice march higher. We had a 10% drawdown in late 2023, but last year was really stable. Max drawdown of 8.5%.

Now we are, depending on the moment you check, down something like 16%, 17% from the all-time high on February 19th. Total return is still around 50% since that low in October of 2022, but certainly, quite an unwind we have seen very quickly since the highs earlier this year.

Brent: Right. And to reset this, right, if we had a 20% or greater drawdown, that would sort of reset this bull market run. But, again, highlighting that we are still up 50% cumulatively, roughly from that October 12th, 2022 low. So again, it's not just been equity volatility.

Fixed-income and rates volatility has been pretty significant. On the left side here, we're looking at the 10-year Treasury yield. And remember, when yields fall, bond prices go up. And you can see from the highs, Phil, that we had back on January 14th of 2025, 10-year yields have fallen 85 basis points through April 4th at about 2 pm.

But more recently in the last couple days, about 42 basis points out of that 85 has occurred just recently. So we have a flight to safety, right, as it relates to what's going on in equity markets and, again, a significant move up in fixed income.

On the right side, we're looking at the dark blue line being investment grade corporate bonds. The gold line is high yield corporate bonds. And you can see both have moved up significantly. When yields go up, right—so spreads widen out—prices go down.

So you can see both corporate investment grade bond spreads as well as high-yield bond spreads have acted very similarly to equity markets, not nearly as much from a percentage perspective and basis point perspective. But we are starting to see, at the margin, corporate bonds—both investment grade and sub-investment grade—starting to widen out and feel pressure.

Phil: Right. When you see that spread increase versus treasuries, it's an indicator of heightened risk. What's interesting is that neither are beyond levels we received in 2023.

Brent: Exactly.

Phil: So you are seeing spreads widen—that certainly could continue—but somewhat contained when you look over the recent years, which is certainly a positive.

So let's talk about foreign exchange on this slide. Here we're showing the US Dollar Index. Lots of strength in recent years, and now we've had quite an unwind in terms of dollar weakness—down about 6.3%.

Just as a reminder, this can be supportive of exports, all else equal. Of course, there's a lot of other variables interacting right now, but dollar weakness certainly can help export. So it's not necessarily a negative for the economy, but something we're watching and something that market participants are watching pretty closely.

Brent: Yeah, and the current administration had talked about wanting to see a weaker dollar that would, to put your point, support exports. But I think the most important thing is this is likely to continue to be volatile. And the dollar, you know, relative to our trading partners, will absolutely vary significantly based on whether or not various countries come to the table or not to renegotiate or apply or not apply additional tariffs.

Phil: Yeah, and this is just looking broad index, of course—can be very different by country.

Brent: So another commodity that has fallen sharply in the last couple of days has been crude oil. WTI is down about 11% in the last couple of days. And, again, this is through April 4th at about 2 pm.

And while much of that might lend itself, I think, between you and me as far as a more representative picture of global growth concerns and that expectation or potential for a recession in the next 12 months. If I take the positive side of it, it might help and declining fuel prices might be a positive for consumers as that as well as food is a pretty significant input into day-to-day activities.

Phil: That's right.

Brent: So that's kind of a summary of what's going on in financial asset markets. So how do you make heads or tails of all this, and how should you be thinking about it?

And this is a slide that Phil and I have covered quite often, and we want you to take this out of this presentation deck and hang it up on your wall and remind yourself when we get into times like this to understand that we've been here before and that, usually, the pain is relatively short-lived. And more often than not, you recover faster than you would expect.

So what are we looking at here? This is every 10% or greater decline since 1950. And what I want you to focus on is the gray box that summarizes all of this. And you can see the average and median drawdown is relatively short-lived. Average about 7 months, median observation about 3.4 months.

And on average, we've fallen about 20%. We were down about 16%, 17%. Average has been about 20%, medians have been about 15%. When we think about the time to recovery, though, that 1 year off of the low—regardless of how long it takes you—on average, you've recovered about 106% of the peak value of the equity markets 1 year off the bottom.

And then when you get to the very last column and you think about how long does it take from peak to full recover of your dollars—on average, only 14.6 months and median about 9.3. As you run your eyes through some of the more significant events, look at the 1 year recovery to the previous high. Even when it took a long time—54 months, 79 months, 42 months, right—you can see how much we recovered in percentage terms in that first year.

So making sure that you stay invested as you said really nicely—time in the markets, not timing the markets is what matters.

Phil: Yeah. It's really an important time to remember that. And this is something else we've shown a lot, as we flip ahead. Market timing is quote, a dangerous game.

And the real reason is is that if you miss just the best days in the market, your return is muted, right? Here we're showing 1995 to 2024. If you're fully invested, look what $10,000 became: $130,000.

If you miss just the 5 best days, you're 37% less. And, of course, the more days you miss, the worse it is. Again, time in the markets. Why might this be? Well, nearly half of S&P 500's strongest days occurred during a bear market. Another 28% of the best days took place in the first 2 months of a bull market, when you don't know you're in a bull market.

So the truth is, when the market bounces around that can be both down and up. For long-term investors, the plan is what's important—and I know we're going to talk about that more in a moment—but making sure you have the right buckets.

Equities are by their nature a volatile asset class, and that can be in up years like 2024. We had a really strong up year. You can also, of course, have downdrafts as well. But the real thing to remember is to have the correct buckets for long-term assets. Equities, yes, they are volatile, but they win in the long term.

Brent: Yeah. So let's try and bring this all together, right? So I think, first of all, there's going to be significantly more headlines that are going to be hitting the newswires.

There's going to ultimately be, we think, a lot of back-and-forth negotiations between the US and other important trading nations. But I think what you should all expect is that we're going to potentially have continued market and economic volatility over the short term as things get ironed out like we think that they will.

And I think what's most important, and kind of where I started is—what should you be doing about it? I think in times like this, Phil, you have to focus on what you can control. And what are those things that you can control? Well, it's your financial plan. It's your underlying goals and objectives. It's your asset allocation.

If you're in a portfolio, and hypothetically, let's pick one—let's say you're 80/20, 90/10 stocks to bonds—and this market volatility is really, really concerning you, and you can't sleep at night, you might want to readdress and think about what your asset allocation is relative to your risk tolerance and your underlying plan.

And I think the most important thing is that you need to stay close to your First Citizens partner, staying close to us and allowing us to hold your hand and manage through these volatile times. Let us help you navigate that course of action.

I know Phil and I will be keeping up with all of this. We will be back with you as more things develop, so please stay tuned.

Making Sense

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Brent Ciliano, SVP

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Phillip Neuhart, SVP

Director of Market and Economic Research

Blake Taylor

Market and Economic Research Analyst

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Authors

Brent Ciliano CFA | SVP, Chief Investment Officer

Capital Management Group | First Citizens Bank

8510 Colonnade Center Drive | Raleigh, NC 27615

Brent.Ciliano@FirstCitizens.com | 919-716-2650

Phillip Neuhart | SVP, Director of Market & Economic Research

Capital Management Group | First Citizens Bank

8510 Colonnade Center Drive | Raleigh, NC 27615

Phillip.Neuhart@FirstCitizens.com | 919-716-2403

Blake Taylor | VP, Market & Economic Research Analyst

Capital Management Group | First Citizens Bank

8510 Colonnade Center Drive | Raleigh, NC 27615

Blake.Taylor@FirstCitizens.com | 919-716-7964

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