Liberation Day or Detonation Day? Markets Rattle as Tariffs Roar

Given the events that transpired this week, it seems suitable to lead with one of Vladimir Lenin’s famous quotes: “There are decades where nothing happens; and there are weeks where decades happen.” What was dubbed by the U.S. administration as “Liberation Day” on April 2^nd will go down in history as the day the U.S. forged ahead with an aggressive action plan aimed at restructuring the global trading system, which in-turn obliterated the stock market. Although there have been clues that protectionist trade policy would be a more prominent feature of this administration’s agenda, given Donald Trump’s affinity for tariffs and Stephen Miran’s whitepaper on the benefits tariffs would have on reshaping the global trading system, the outcome from the April 2^nd announcement was far more aggressive than anyone had imagined. While there are a range of estimates on how the Liberation Day announcement will impact the average tariff rate for U.S. imports, none of them are optimistic and you must look hard to find a positive spin. The Budget Lab at Yale is forecasting that the average rate will now rise to 22.5%, a massive increase from the 2.5% rate in 2024. This level would be the highest average tariff rate since 1909—above the level from the protectionist-era Smooth-Hawley tariffs of the 1930s—and is estimated to hit real GDP growth in the U.S. by almost a full percentage point in 2025. JPMorgan is now expecting that the U.S. will fall into a recession in 2025.

The egregious stance towards reducing the U.S. trade deficit by slamming the breaks on global trade has resulted in risk assets getting the rug pulled out from under them as market participants reprice the probability of a global recession. Capital gains have certainly been liberated over the two days, with global equity markets down -10.4% in CAD terms, the S&P 500 is down -11.2%, and the S&P TSX is down -8.4%. International markets have fared somewhat better, with European stocks down -7.7% in CAD terms and Japanese equities down -4.9%. While bond markets continue to find a bid on the flight to safety, the gains have been somewhat muted as investors weigh the impact that tariffs will have on consumer prices, and whether the Federal Reserve (and other central banks) will be able to ease monetary policy as much as they would like without inflation expectations becoming unanchored. The worries of “stagflation” have limited a more aggressive movement into fixed income. Somewhat surprisingly, traditional safe-haven assets like the U.S. dollar and gold have fared poorly in the aftermath of the tariff announcements, down -0.8% and -4.1% respectively, signaling elevated levels of concern around the potential for a more unorderly unwind of risk. The euro and yen have been benefactors in an environment of dollar weakness, with each currency up +1.0% and +1.6% respectively, which is helping to bolster international markets relative to U.S. equities. Volatility markets are starting to pick up, though we’re not yet near the panicked levels we saw in August of last year or during the COVID sell-off, and equity selling seems relatively orderly for the moment. Spot VIX closed at 45 on Friday, though we’ve yet to see an expansion further out on the curve. This could be a function of market participants anticipating some sort of “rollback” on the aggressive tariff policy stance over the weekend or early next week, given that the additional tariff amounts on top of the 10% base rate don’t go into effect until April 9^th.

Throughout this bout of volatility in financial markets, the Viewpoint strategies have also experienced negative performance but are still retaining positive relative performance year-to-date. The Viewpoint Enhanced Global Multi-Asset (VEMA) fund* is down -7.6% year-to-date, outperforming global equities, which are down -10.9%. The Viewpoint Global Multi-Asset (VMA) fund** is down -3.5% year-to-date, outperforming a global 60/40 portfolio that is down -5.3%. Both strategies are reacting to the increase in financial market volatility and are defensively reducing gross exposure to keep risk exposure stable as uncertainty rises. The strategies reduced gross exposure on Friday morning and will be continuing to do so Sunday night/Monday morning. The quantitative overlays employed by both strategies have also tilted more towards fixed income as trend and momentum are dictating more conservative positioning. In addition, the defensive tail risk overlay is now in a position to begin to benefit from a further expansion of volatility on additional sharp downside moves in equity markets. While there could be more downside if market sentiment continues to deteriorate, the strategies are well positioned for continued relative outperformance if the washout in risk appetite continues. Even if we see a rebound in risk appetite next week on positive negotiations around trade barriers, the antagonistic stance towards U.S. trading partners is likely to have fundamentally changed these trading relationships for the long term. Multi-asset portfolios like the Viewpoint strategies that lean into global diversification and are adaptive to changing cross-asset relationships continue to be well positioned in this environment where the U.S. shifts towards a more isolationist stance. However this recent bout of volatility resolves itself, it will be pertinent going forward for investors to have exposure to international markets. It doesn’t seem like there is much appetite for the U.S. administration to increase their fiscal support to insulate against a slowdown in growth, as they have previously committed to narrowing the fiscal deficit as a way to get borrowing costs lower. International markets seem far more inclined to undertake expansionary fiscal policy directed at infrastructure and defense to combat a global slowdown, and the U.S. could lag as it takes a more austere approach to rebalancing its own economy.

The Viewpoint Diversified Commodities (VCOM) fund*** has struggled in this environment as market participants increase the probability of a recession and a hit to global demand for commodities. The VCOM strategy is down -4.9% year-to-date, lagging the Bloomberg Commodities Total Return index, which is up +2.1% year-to-date. The softs subsector has been hit particularly hard from the potential for retaliatory tariffs hampering demand for agricultural goods produced in the U.S. and a general slowdown in global growth. The underperformance of this sector is the main catalyst for the relative underperformance of the VCOM strategy year-to-date. That being said, since the Liberation Day announcement on April 2^nd, energy markets have started to more aggressively price in the possibility of a recession, with crude oil falling -13% over the last two trading days. With VCOM’s lower exposure to energy markets due to their highly volatile nature, if risk appetite continues to deteriorate, the VCOM strategy could see some benefits in terms of its relative performance compared to more energy-heavy strategies.

Heading into next week, I see three scenarios that could potentially unfold.

SHORT-TERM REVERSAL IN RISK APPETITE (60% PROBABILITY) 

The only potentially optimistic spin from the April 2^nd announcement was that there were no additional tariffs on Canada and Mexico. This hints at the potential that the U.S. administration, despite being hard on Canada and Mexico out of the gate, is looking to strengthen the North American trading relationship relative to the rest of the world and particularly Asia. If you take the view that these tariffs are aimed at being punitive towards China and their supply chains, there is the potential that a grand re-shoring strategy for both low and high value manufacturing is likely to include Mexico. Given that Mexican exports to the U.S. contain on average about 40% U.S. content versus 5% for Chinese exports, there is the potential that low value manufacturing continues to move away from Asia to Mexico. This would be a longer-term trend and would somewhat align with the U.S. administration’s other goals of reducing the pace of legal and illegal immigration into the U.S. The short-term bounce in risk appetite is likely to come from rumors or announcements that trade deals are being forged with what the U.S. had deemed as “less-friendly” trading partners, and the fear that global growth will stall out is somewhat alleviated. Under this scenario, I see a short-term bump to risk appetite but continued elevated volatility as the U.S. continues with its fiscal detox plans and the rest of the world forges closer trading relationships with each other to supplement U.S. demand. In a scenario where we see a short-term bump in risk appetite, the Viewpoint multi-asset strategies would take advantage of this by continuing to get more defensive and de-gross on rallies, well positioned for positive relative performance to equity markets on continued heightened volatility.

BULLISH REVERSAL IN RISK APPETITE (10% PROBABILITY)

The U.S. administration caves to the negative publicity around the roll out of the tariff plan and fires Commerce Secretary Howard Lutnick. The formula used to calculate the reciprocal tariffs for each country takes the country’s trade surplus that it runs with the U.S. as a ratio of its exports to the U.S. and then divides that in half. The communication from the administration is that the formula aims to drive the bilateral trade deficits to zero, which not only doesn’t make economic sense from a competitive advantage standpoint, but countries where the U.S. runs a trade surplus were also hit with a 10% base tariff. Further to the surprisingly simple tariff formula, it appears as if the administration used the wrong elasticity of import prices relative to tariffs in the formula, incorrectly using the elasticity of retail prices to tariffs, not import prices to tariffs. Making the adjustment with a higher elasticity in the formula would reduce the tariffs applied to each country to about a fourth of the stated level, and most countries would now fall to the 10% floor, which would be much more manageable from a global growth perspective. Lutnick being the most likely sacrificial lamb from Trump’s administration and the potential for a dramatic rollback of tariff policy could see much of the recent dour sentiment in financial markets reverse. In a scenario where this is a full reversal of risk appetite, the Viewpoint multi-asset strategies will likely see positive absolute performance but will likely lag equity markets in the short term until gross exposure is built back up should volatility return back to Liberation Day levels.

MELTDOWN CONTINUATION (30% PROBABILITY)

If there is no news over the weekend of negotiations around trade deals and a reduction of tariff levels (Europe and China have already proposed retaliatory tariffs on the U.S.), the dour sentiment and a more pronounced wash-out in risk appetite could continue. Retail investors bought $4.7 billion in equities on Thursday, only for the dip to keep on dipping Friday. A continuation of the downdraft in equity markets could spark a cascading effect where margin calls and leverage unwinding forces additional selling without any meaningful headlines to prompt continued buying from investors. U.S. equities aren’t particularly cheap with a forward price-to-earnings ratio of roughly 19x, which is still above the 75^th percentile over the last 20 years. The S&P 500 is only off -17% from its most recent high, so if the U.S. administration is willing to put equity markets through max pain, stocks can certainly still move lower from Friday’s close. Under the scenario where the market meltdown continues, the Viewpoint multi-asset strategies could see negative absolute performance but will likely outperform equity markets due to the more conservative positioning and the defensive tail risk hedge strategies.

While the dust has yet to settle and we’ll likely continue to be bombarded by tariff-related headlines, one thing is clear: adaptability and global diversification remain the cornerstones of a resilient investment strategy in a rapidly evolving macro landscape.

Stay safe out there!

Scott Smith
Chief Investment Officer

DISCLOSURES & DISCLAIMER

Returns are net of fees for the period January 1, 20205 through April 4, 2025.
* Viewpoint Enhanced Global Multi-Asset Fund (fund code VWP308).
** Viewpoint Global Multi-Asset Fund (fund code VWP208).
*** Viewpoint Diversified Commodities Fund (fund code VWP608)
The prospectus can be found on our website and contains detailed information about the mutual funds. Mutual funds are not guaranteed, their values change frequently, and past performance is not an indication of future returns.