Uncertainty among investors continued throughout February, primarily in response to continued economic doubts, difficulty in predicting the final tariff policies to be implemented, and the resurfacing of recession fears. Equity markets declined for the month across all market cap segments. Bonds and real estate, however, had a strong month as investors appear to have begun fleeing to safety, and declining yields have boosted returns in these two asset classes, which have become increasingly attractive amidst the turbulent start to 2025.
“Both Consumer and Investor Sentiment metrics have declined substantially for February, and a major concern is that a return of rising inflation could further dampen demand at a time when consumers are already feeling the impact of higher prices.”
The prevailing theme thus far in early 2025 has centered around President Trump’s proposed tariffs, and the recent escalation we’ve seen with certain trade partners. The differing opinions on what the ultimate impact will be for the U.S. economy and domestic corporate earnings have created uncertainty among investors. We’ve previously written about the complexity of the multi-dimensional impacts of tariffs and how numerous offsetting inflationary and deflationary variables make it extremely difficult to accurately forecast the net outcome on inflation and Gross Domestic Product (GDP). As a brief recap, our view is that the overall long-term impact of Trump’s trade policy could likely be less drastic than many are advocating as certain industries re-shore manufacturing and production and strengthen domestically. However, in the short-term, more severe tariffs could very well dampen near-term GDP growth and see a return of inflationary pressures.
A brief summary of U.S. tariff policy developments:
Canada & Mexico: a 25% blanket tariff went into effect on March 4th, however Trump confirmed a pause on all goods and services compliant with the United States-Mexico-Canada Agreement until April 2nd.[1]
China: The initial 10% blanket tariff went into effect in February, with China responding with their own tariffs of 15% on US coal and natural gas, and 10% on crude oil, farm equipment, and automobiles. Trump countered by further increasing the rate on Chinese imports to 20% effective March 4th.[2],[3]
European Union: Trump has referenced the possibility of tariffs on the EU, which would significantly expand the scope of US trading partners impacted by US trade policy.3
Other: Trump announced a 25% tariff on all imports of steel and aluminum from all countries to go into effect on March 12th. Trump further announced on March 1st an executive order to investigate the effects of timber and lumber imports, which account for roughly 30% of the wood product used in U.S. housing construction. Trump further announced on Friday March 7th that reciprocal tariffs on Canadian lumber and dairy products may be coming soon.[4],[5]
While the markets can often move irrespective to economic data, the uncertainty from Trump’s trade policy and where tariffs will ultimately land has brought a resurgence of recession fears, driving down sentiment and leading to the recent flight to safety. Both Consumer and Investor Sentiment metrics have declined substantially for February, and a major concern is that a return of rising inflation could further dampen demand at a time when consumers are already feeling the impact of higher prices. Less demand for goods, coupled with the challenges from Trump’s tariffs may put significant pressure on corporate earnings, and thus downward pressure on domestic equity valuations.
Many prominent commentators have begun sounding the alarm again for a potential recession as a result of the 10-year / 3-month yield curve inverting again on February 26th. While this leading indicator has in fact had a perfect track record for predicting U.S. recessions since 1968, we have been pointing to weak economic activity for quite some time already, noting that a major reason we have not experienced an official recession yet has been the fact that government spending has propped up U.S. GDP growth. From the end of 2020 through the end of 2024, annual nominal GDP grew by approximately $7.83 Trillion, while US Government Debt grew by over $8.47 Trillion. In 2024 alone, annual GDP estimates show growth of $1.46 Trillion, while the total US Government Debt grew by over $2.2 Trillion.[6],[7] With trade policies going into effect and the new Department of Government Efficiency (DOGE) committed to reforming government spending, the recessionary headwinds that many Americans have already been feeling may finally become more visible.
Turning back to developing market conditions, U.S. equities are seeing significant downward pressure, with many stock indices – including the NASDAQ Composite, NASDAQ 100, and S&P 600 Small Cap Indexes – declining below their 200-day moving averages, indicative of strong negative momentum. The S&P 500 Large Cap equity index declined -1.30% for the month, while mid caps dropped -4.35% and small caps retreated even further at -5.71% for the month. However, international equities have demonstrated resilience thus far in 2025, with the MSCI All World ex-US All Cap index returning 6.20% year-to-date, and a positive 1.46% return for the month of February. As uncertainty and volatility continues to grip headlines in U.S. domestic equity markets, now may be an opportunity to bolster portfolios with further diversification into international equity exposure.
[2] https://finance.yahoo.com/news/chinas-finance-ministry-announces-tariffs-052845300.html
[6] https://fiscaldata.treasury.gov/datasets/debt-to-the-penny/debt-to-the-penny
[7] https://www.bea.gov/data/gdp/gross-domestic-product
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~Diligently Yours,
Your Smarter Way Portfolio Management Team
Please note this is for information purposes only and should not be construed as investment advice or recommendations made by A Smarter Way to Invest. Please contact your Advisor if you have any questions about this market update report or if you would like to discuss your personal financial situation in more detail.
