2025 Q1 Mid-Quarter CIO Letter: Chaos and Confusion Meets Priced for Perfection
I’ve always maintained that the promises made by Presidential candidates during their campaigns and the reality they face upon taking office are often worlds apart. This time around, there are two notable differences. First, President Trump already has the advantage of understanding the inner workings of the White House from his first term. Second, it seems he is less concerned about how his policies are perceived by the public, foreign nations, or political opponents.
We finally have a clearer (though perhaps too generous a term?) picture of what Trump’s Presidency means for the markets and economy. We’re only focusing on market and economic perspectives, specifically commenting on policies that impact these areas.
Keep in mind that things are still fluid, and much of this could quickly become irrelevant, but as it stands:
Tariffs
This week President Trump enacted 25% tariffs on both Mexican and Canadian goods and doubled the tariff rate on Chinese imports from 10% to 20%.
These tariffs could face legal challenges, as they are being implemented under the International Emergency Economic Powers Act (IEEPA), not previously used for tariffs. The broad nature of the Mexican and Canadian tariffs makes them vulnerable to court challenges. It is possible President Trump is testing the waters with these measures, if they go unchallenged, he could extend similar tariffs to other countries. We expect Europe to be next.
We did not anticipate actual broad implementation of tariffs on Mexico and Canada given how integral both countries are to our economy. If they persist, consumers could face higher prices, lower real incomes, and a deteriorating employment picture and this will likely squeeze corporate margins and lower revenues. Canada and Mexico will likely be in a recession as a result if these tariffs remain in place.
We are seeing the first sign of tariffs softening with Mexico and Canada winning a delay in auto tariffs for one month on Wednesday. Wednesday night there seemed to be news that certain agricultural products may also be carved out and by the close of day Thursday President Trump had delayed tariffs for Canada and Mexico on goods under USMCA.
According to Trade Partnership Worldwide (TPW), 50% of Mexico’s 2024 exports and 38% of Canada’s entered the US under USMCA. The Wall Street Journal wrote, TPW “estimates that each day the US imports $1 billion of goods from Canada and Mexico that faced no tariffs even without USMCA. That means companies could be on the hook for $250 million a day in new tariffs.”[1]
While President Trump initially took a softer approach toward China than we expected, he has now raised tariffs on Chinese goods higher than in his first term. Personally, I believe the pressure related to the DeepSeek news may have contributed to this. I think this pressure is less likely to reverse than the tariffs on Canada and Mexico.
This incremental approach to tariffs could result in more prolonged uncertainty and economic pain than a more abrupt, one-time implementation. Limbo creates uncertainty and confusion as no one knows what the end game looks like. It is also more difficult to dissect what inflation and slower economic growth is temporary and directly attributable to the tariffs versus a more permanent softening of the economy or increasing inflation. The longer the uncertainty persists, the more damage it will do as companies delay major decisions.
The Economy and Markets
As we discussed in our Q4 CIO letter, this is a very different economy and market from the one President Trump inherited in his first term. Bond yields are much higher, inflation exists and is a threat to stability, our deficit and fiscal position are much worse, global economic growth is slowing, and US valuations are higher now.
It seems like a plan of “pain first, tax cuts later”, unlike the sequence during Trump’s first presidency. Right now, there are some liquidity tailwinds that we will not get into in this note that are helping keep yields down and the dollar from strengthening too much. However, this is temporary and is likely to reverse soon.
The Department of Government Efficiency (DOGE) has essentially removed the fiscal punch bowl that had been sustaining the economy over the past year. We believe everyone is underestimating how stimulative this was and overestimating what the data will look like without this spending.
To sustain economic health, the private sector spending and hiring needed to be able to pick up where the public sector left off. However, survey data that we track is suggesting the immense uncertainty and confusion that have ensued since inauguration day may have fumbled the baton. There is still hope that it can recover, but the longer this continues the less likely it is.
Recent survey data suggests the US economy is slowing rapidly. The newly imposed tariffs will likely accelerate the slowdown. This is on top of the headwinds to economic growth from decreased spending through DOGE, lower State and Local government spending, and a reduction in immigration. Presently, the market is still expecting healthy growth and margins this year and is not factoring in recession risk.
Tariffs as well as the stoppage of immigration flows have the potential to be inflationary at a time when inflation is already firming. This poses a difficult dilemma for the Federal Reserve and could inhibit its ability to respond effectively if economic growth stalls.
A rollover in the economy, and subsequently government revenues could exacerbate the debt situation. Furthermore, if we continue to strain relations with foreign countries, we risk alienating key buyers of our government debt.
With all the chaos, the focus has been taken away from the potential for another government shutdown on March 14th if legislation is not passed.
In our view, these developments have greatly increased the likelihood of a recession, which could begin with a negative print as early as this quarter. The challenge is a swift reversal of these policies would drastically alter this outlook. President Trump has historically used the stock market as his report card. The question is whether he changes his tune if the selloff accelerates from here.
We are monitoring these developments very closely. While we are positioned very well for this environment we will be tweaking as we see necessary. We have plenty of dry powder to put to work as we see opportunities.
Please reach out with any questions.
Kasey
[1] https://www.wsj.com/economy/trade/big-chunk-of-north-american-trade-remains-exposed-to-tariffs-c13b4674?mod=hp_lead_pos2
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