Trade War 2.0: Liberation Day or Global Market Meltdown?
“Everyone has a plan until they get punched in the mouth.” – Mike Tyson
Investors are navigating a market landscape that bears little resemblance to the exuberance of the past two years. It almost feels like an alternative universe in the face of Trump’s trade war 2.0 approaching. The S&P 500 and Nasdaq have dropped nearly 5% and 10% year-to-date, while the Mag-7 tech giants have plunged 20% into bear market territory – marking one of the worst starts to a year in recent memory. Lingering inflation, economic uncertainty, and the Trump tariff-fueled policy roulette have all contributed to the selloff.
Many investors who are overweight in big-name tech stocks just took a punch to their portfolio and are now questioning how much worse things could get. Meanwhile, for 60/40 balanced investors, this shift has been quite less painful. Unlike tech-heavy portfolios that have been battered, a well-diversified mix of stocks, bonds, international equities, and real assets is holding up – bringing many balanced investors close to breakeven for the year.
With headlines touting uncertainty, like a recent WSJ article stating, “Corporate America euphoria over Trump’s ‘Golden Age’ is giving way to distress,” it’s clear that American CEOs and investors are increasingly uneasy over whipsaw policy changes and complacency about recession risks.
Liberation Day (April 2nd)
April 2nd was initially set to be remembered as Trump’s ‘Liberation Day’ marked by sweeping tariff increases across multiple countries, industries, and products. But in a surprising turn, Trump’s stance has shifted, moving beyond reciprocal tariffs to propose an across-the-board 20% levy on virtually every nation engaged in trade with America. From the White House to Wall Street and foreign capitals, this new tariff strategy is sparking heightened anxiety globally. As the rhetoric continues to evolve, uncertainty grows about the long-term impacts of these bold moves.
The broad application of tariffs as part of Trump’s trade strategy risks unintended consequences, including reduced demand for U.S. exports, the formation of alternative trade alliances, and increased costs for American industries.
History offers a cautionary tale. During the 2018 trade war with China, tariffs on American agricultural products hurt U.S. farmers, leading to immediate market declines in corn, pork, and beef. To offset the damage, the government rolled out the Market Facilitation Program (MFP), distributing over $23 billion in subsidies to struggling farmers – highlighting the steep costs of tariff battles.
A Rolling Bear Market: Sector Rotation
The market’s old playbook no longer applies – and many investors are struggling to adjust. The Magnificent Seven no longer carries the market, once-forgotten sectors are surging, bonds are stabilizing portfolios, and volatility is back in full force. The past two years rewarded growth-at-any-cost investors. In 2025, it’s a different game entirely. Still, navigating around big tech remains critical, as these stocks make up nearly 35% of the S&P 500 and drive almost half of its volatility. Betting on tech while hedging risk will take some thought, insight and creativity.
Markets move in cycles, and those who recognize the shift – rather than cling to the past – will be the ones who come out ahead. While tech stocks teeter in bear market territory, other sectors are quietly accelerating, reinforcing the power of diversification and strategic portfolio management. This isn’t a broad collapse – it’s a rotation: value stocks are outperforming growth, international markets are greatly outpacing U.S. equities, the energy sector is up YTD, and gold has surged to record highs.
Not Everything is Moving in the Same Direction
While the overall market faces uncertainty, some sectors have performed exceptionally well over the past few months. Tech-driven sectors, especially those linked to artificial intelligence, have led the charge for years, but with tech currently underperforming, it’s a reminder that diversification is key. Even as AI stocks and the tech sector face a downturn, other regions and asset classes are stepping up.
Bonds, for example, have performed well as interest rates have softened, helping to offset the declines in the stock market. In difficult market environments like this, positive bond returns can provide much-needed stability in diversified portfolios.
History shows that maintaining a long-term perspective is one of the most effective ways to navigate market volatility. While short-term swings may feel unsettling, investors who remain consistently invested through market cycles have historically reaped the benefits of compound returns. As we see with the following chart of YTD sector performance, not all sectors are moving in the same direction – demonstrating that a well-balanced portfolio can help investors weather unpredictable markets. So, while trade headlines will continue to dominate the news, remember that successful investing is about achieving long-term financial goals, not reacting to every blip on the radar.
Trump Put and Fed Put: No Guarantees This Time
We’ve written before about how Trump’s tariff war with China rattled markets in late 2018, only for a resolution to help fuel a blockbuster year for stocks in 2019 with the S&P 500 up over 25%. But as 2025 unfolds, it’s far from certain that a Trump or Fed “put” will rescue investors from this downturn.
The “Fed put” refers to the belief that the Federal Reserve will intervene to stabilize markets, using rate cuts or quantitative easing when stocks tumble. Similarly, the “Trump put” stems from the expectation that Trump, known for his market-friendly policies, would take action—whether through tax cuts or tariff rollbacks – to prevent a prolonged sell-off. These forces provided a backstop for investors during Trump’s first term and past Fed interventions.
However, both assumptions are now being put to the test. Instead of delivering relief, Trump’s latest tariffs have fueled volatility, leaving investors wondering whether he will pivot to shore up confidence. Meanwhile, the Fed remains hesitant to act preemptively, suggesting that it may need to see a more severe downturn before stepping in. With no clear safety net in sight, investors may have to rely more on fundamentals, diversification, and risk management rather than hoping for a policy-driven bailout.
What Tariffs and a Trade War Mean for Long-Term Investors
Investors have faced several market concerns early in the year around tech stocks, interest rates, and government policy. Among these factors, it’s no surprise that trade policy has emerged as particularly significant for markets. President Trump has launched various trade measures, including tariffs on Canada, Mexico, China, and the European Union. How should investors react to these news headlines?
The U.S. runs a significant trade deficit
For long-term investors, it’s important to maintain perspective as the situation evolves and to stay focused on what you can control. Recent events have shown how quickly headlines can shift, and tariff threats are not a guarantee that they will be enacted. This is because the Trump administration has multiple objectives when imposing tariffs beyond protecting American industries. Tariffs are also used as a means of negotiating with other countries to impose border control, prevent the influx of illegal drugs, and to raise government revenue.
The U.S. has a long history of using tariffs to protect domestic industries, a concept known as protectionism. This dates back to at least the Industrial Revolution when tariffs supported American manufacturing. Later, the McKinley Tariff of 1890 raised import duties to nearly 50% on many goods, marking one of the highest tariff rates in U.S. history. The Smoot-Hawley Tariffs of 1930 still serve as a cautionary tale since they slowed global trade and are thought to have worsened the Great Depression.
These historical experiences led to decades of more open trade, including the establishment of international trade organizations. In theory, free trade works well when each country can focus on what it does best, selling its products and services to benefit all nations. While this fueled global economic growth, it also had the negative effect of displacing American workers as manufacturing shifted to countries with lower labor costs.
In many ways, the pendulum has swung back toward protectionist policies, with President Trump’s renewed focus on using tariffs as a key policy tool, just as he did during his first administration. The chart above shows that the U.S. operates with a significant trade deficit since we import far more than we export.
Recent trade actions include a new 25% tariff on steel and aluminum that could apply to all trading partners, reciprocal tariffs on those that impose duties on American goods, postponed tariffs on Canada and Mexico, and additional tariffs on China. China’s counter-response includes new 15% tariffs on energy imports and 10% on various U.S. industrial and agricultural products, echoing the 2018-2019 trade disputes. This pattern of escalating tariffs has sparked concerns of an emerging “trade war.”
The role and importance of tariffs have changed over time
Market reactions to tariff announcements often prove more dramatic than their actual economic impact. During Trump’s first term, markets generated healthy returns despite fears of trade wars. The trade disputes of 2018 and 2019 did not result in the severe global consequences many anticipated. Tariffs during this time were used as a negotiating tool, resulting in the United States-Mexico-Canada Agreement (USMCA) and a trade deal with China.
In the chart above, tariffs fall under the “Other” category and contribute only 1% to 2% of total government revenue, highlighting how insignificant they are relative to taxes. That said, many politicians and economists would like to see the trade balance improve. This could potentially strengthen domestic manufacturing, increase employment in export-oriented industries, and reduce reliance on foreign borrowing.
On the other hand, the trade deficit also reflects the underlying strength of the U.S. economy and consumer purchasing power. When Americans have more disposable income, they can afford to buy more imported goods, naturally leading to a larger trade deficit. Furthermore, the deficit is partially offset by significant capital inflows into U.S. markets, as foreign investors seek the stability and opportunities available in American assets. This investment helps fund innovation, business expansion, and job creation domestically.
The dollar has strengthened since the election
Trade concerns have also led to a stronger dollar since last year’s presidential election. This is because trade and currencies are fundamentally linked. Importing foreign goods requires selling dollars to buy other currencies, so reducing these imports strengthens the dollar. As the chart above shows, the dollar has risen in value against many major currencies over the past several months.
Another impact of tariffs is the potential effect on consumer prices and inflation. When tariffs are imposed on imported goods, businesses often pass these additional costs on to consumers in the form of higher prices. This inflationary pressure is particularly noticeable in sectors heavily reliant on international trade, such as consumer electronics, automobiles, and household goods.
So, it’s important for investors to keep these developments in perspective. Tariffs have multiple objectives, not all of which should affect financial markets in the long run. While they can cause financial uncertainty, impact the U.S. dollar, and potentially lead to higher consumer prices, past episodes also show that markets can perform well in spite of these concerns.
The bottom line? While Trump’s trade war 2.0 roils markets, history shows that tariff effects on financial markets are often overstated. Investors should continue to focus on their long-run financial goals and not overreact to short-term headlines.
For more information on our firm or to request a complementary investment and retirement check-up with Jon W. Ulin, CFP®, please call us at (561) 210-7887 or email jon.ulin@ulinwealth.com.
Diversification does not ensure a profit or guarantee against loss. You cannot invest directly in an index.
Note: This content is for informational purposes only and should not be construed as financial, legal, or tax advice. Please consult your financial advisor, attorney, or tax professional regarding your specific situation.
You cannot invest directly in an index. Past performance is no guarantee of future returns. Diversification does not ensure a profit or guarantee against loss. All examples and charts shown are hypothetical used for illustrative purposes only and do not represent any actual investment. The information given herein is taken from sources that are believed to be reliable, but it is not guaranteed by us as to accuracy or completeness. This is for informational purposes only and in no event should be construed as an offer to sell or solicitation of an offer to buy any securities or products. Please consult your tax and/or legal advisor before implementing any tax and/or legal related strategies mentioned in this publication as NewEdge Advisors, LLC does not provide tax and/or legal advice. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors.
