What Lies Ahead in Trump’s Trade War After a Week of Market Turmoil

Ivanna Hampton: Welcome to Investing Insights. I’m your host, Ivanna Hampton.

Investing Insights is helping investors navigate market volatility in a new series. Morningstar strategists and authors will deliver timely insights, trends, and tips. These episodes will pop into your podcast feed at least once a month.

This week’s episode examines the uncertainty concerning the Trump administration’s trade war. The unprecedented tariffs shocked global markets. Morningstar forecasters changed their outlooks for inflation, economic growth, and recession.

I talked with Dominic Pappalardo about what investors should know. He’s the chief multi-asset strategist for Morningstar Investment Management.

Thanks for being here, Dom.

Dominic Pappalardo: Great to be here, Ivanna.

What an Escalating Trade War Between the US and China Could Mean

Hampton: Well, the trade war between the US and China has escalated. Both nations have raised tariffs significantly over the past week. What do you make of that? First, let’s time-stamp this moment. It’s Thursday, April 10, just before 10 a.m. You have the floor.

Pappalardo: The situation with China has definitely escalated. Both countries have retaliated against one another after the initial announcements from Liberation Day, even prior to Liberation Day. I think it’s becoming more apparent that the White House is really viewing this trade war as a direct conflict with China, more so than any other country. I think Canada and Mexico matter a fair amount, just because they’re so local to the US, but globally, China is really the country that the White House is worried about regulating trade relations with.

Macroeconomic Trends and Rising Deglobalization After Trump’s Tariffs

Hampton: President Trump has said that taxing foreign products would bring in billions of dollars or more of revenue and rebuild America’s manufacturing industry. How is Morningstar thinking about the macro trends of changing supply chains and less globalization?

Pappalardo: Those claims coming from the White House might be true over the long term. The problem is, it takes a while to realize those benefits. It’s not easy or quick for companies to retool their production, bring it back onshore, adjust their supply chains to go through different countries, whatever solution they may want to implement to avoid tariffs. That all takes time, that all takes money. Frankly. I think that was one of the biggest challenges with the tariff announcement was the immediacy of the implementation. There was no notice given. I believe if the tariffs had been announced with a gradual implementation approach, maybe we scale into it over six months, 12 months, 18 months, whatever it might be, I think the market reactions would’ve been much more muted. Still negative, no doubt, but likely more muted. It was that immediacy that really caused the pain in financial markets.

What Trump’s 90-Day Pause on Tariffs Means for the Markets and Economy

Hampton: The president has announced a 90-day pause on some tariffs. What does a pause like this mean?

Pappalardo: I think the pause is a sign of optimism for people that have dire economic concerns. It also signals that perhaps the terms of the liberation day announcement weren’t quite as final as the president alluded them to be. If the implementation could be delayed, then maybe the rates could be changed, or maybe the countries affected could be changed. It is important to note that China was excluded from that 90-day pause, going back to our previous comments, that further cements the concept that much of this tariff talk is really just targeted at China and focused on our trade imbalance with the Chinese.

How Market Volatility Could Persist After a Tariff-Induced Stock Selloff and Rebound

Hampton: Markets are still choppy following the big stock selloff and later rebound. How long could this volatility remain elevated?

Pappalardo: Certainly, the volatility could remain elevated for quite some time. It’ll really remain in place until we get more certainty around what tariffs will look like in their permanent form. They’re not going to go to zero. They’re not going to go away. But we need some clarity for what they’ll look like, at least for the medium term.

The market volatility is a function of that uncertainty. Until we have more hard data, more facts, that volatility should remain in place. I think yesterday was a great example. We went from market selling off in the morning to rallying double-digit percentages by the afternoon once the 90-day pause was announced. I believe yesterday ranks as one of the top 10 strongest days for global stock markets in history, which ironically followed one of the worst three-day periods for equity markets in history. So again, that volatility is as high as ever, and it’s unlikely that dissipates in the short term.

Why Fixed Income and Equities Are Responding Differently During Market Volatility

Hampton: It’s a memorable few days. Let’s talk about fixed income. With Treasury rates rising, the bond market seems to be sending a different signal than equity markets. What do you think about these diverging trends?

Pappalardo: The reaction in fixed-income markets has been really interesting. I think Treasury bond yields specifically were impacted by both technical factors in the market and fundamental concerns in the market. The market technicals that influenced yields, there was a lot of foreselling as leveraged investors were forced to unwind positions to meet capital and margin requirements. Oftentimes, Treasury bonds are held as the collateral against those leverage trades, and when volatility spikes and asset prices fall like we’ve seen, a lot of those investors are forced to sell the collateral assets, Treasuries, to meet those capital requirements in a very quick manner. You have foresellers that have no choice, that even as the price is getting worse on those bonds, they must liquidate to meet those capital requirements.

The fundamental concerns around Treasury yields going up relate to inflation. Everybody believes that tariffs by definition are inflationary as they absolutely increase prices to consumers. That inflationary pressure, combined with those market technicals, compounded the upward pressure on Treasury yields.

Morningstar Forecasters Predict Higher Economic Risks in 2025

Hampton: Morningstar’s US economics team changed their forecast for inflation, GDP, and recession. Can you explain the risks that they see over the next 12 months?

Pappalardo: Risk of recession went up. Last I heard, we were pegging at about a 40% to 50% probability of a recession in the next 12 months. GDP forecast came down by about half a percent, and CPI, or inflation, projections went up by about half a percent. Really, all of those adjustments are keyed around the higher prices that tariffs are likely to force on consumers. As prices go up, consumers can afford to buy less. Company profit margins will probably shrink a little bit, so equity market performance could suffer. You have all of these things going in the same direction, which is to say, tariffs are putting more negative pressure on consumption in the United States.

Will the Fed Cut Interest Rates in May?

Hampton: The Federal Reserve is scheduled to announce their next interest rate decision in May. Do you think the Fed will be forced to shift their priority from inflation to economic weakness? Why or why not?

Pappalardo: The Fed’s really been stuck in a difficult situation, balancing those two factors that you just talked about. My suspicion is they would’ve liked to have cut rates already, or certainly would like to cut them at the May meeting. However, they’re reticent to do that because they do have these lingering concerns around inflation continuing or even escalating, increasing based on the implementation of tariffs. The Fed, Chairman Powell specifically, has been reticent that combating runaway inflation is priority one for them. I do think that is shifting a bit. Maybe it was 70/30 in favor of guarding against inflation. It’s probably closer to 50/50 today, balancing those two risks equally. We had a CPI released this morning for March inflation data, and it did come in cooler than expected, which is a welcome development for the Fed, I would imagine. It doesn’t mean that they could go out and blindly cut rates immediately, but I do think it’s a step closer to them shifting their focus toward sustaining economic growth and employment as opposed to fighting the inflation battle.

How to Protect Your Retirement Portfolio During Market Volatility

Hampton: You brought up earlier how yesterday was a double-digit day in the market. Folks may be worried about their retirement portfolios. What do you suggest to ease concerns?

Pappalardo: It’s certainly understandable. Nobody likes to see this type of volatility, and certainly, nobody likes to see the value of their investments decline at the rapid rate that we’ve experienced. I think yesterday was a perfect reminder of why it’s so important to remain focused on the long term, have a plan in place, and use discipline to stick to that plan. Obviously, over the last four days, fundamentals haven’t changed by any meaningful amount. It doesn’t happen that quickly. Price volatility has been off the charts. In other words, the market, the prices in the market are adjusting much faster than the underlying fundamentals are, and no investor could ever get the timing right on those wild swings we’ve seen. I believe the stat, if you look back over history, over the last 25 years in the S&P 500, the five best days in that period were responsible for about 36% of the total return generated over 25 years. In other words, if you miss days like yesterday, you’re really doing a disservice to your investments.

What Investors Need to Have on Their Radar

Hampton: That is a good reminder every time I hear you say that. What key developments are you watching for over the next few weeks or months?

Pappalardo: There’s no question that any news or further developments around tariffs and their implementation are going to be paramount in terms of market impact. Away from tariffs, I really think the next release from the Fed after their May meeting will be very impactful. If the Fed hints or signals that they’re closer to their next rate cut, I think that’ll be supportive for the markets. I think the liquidity that helps provide will perhaps curb some future downside to equity markets. In looking at futures market probability for the Fed, there’s only about a 20% chance that they cut in May, but if you roll that out to their June meeting, it’s over an 80% probability that they cut rates in June.

If you look out just a little bit longer, the “market” believes that the next Fed rate cut is fairly close in the future, and if you carry that projection out to the end of 2025, there’s three to four rate cuts priced in. The expectation is for the Fed to start cutting rates again, despite their lingering concerns around inflation.

Hampton: So, something to watch.

Pappalardo: Absolutely.

Hampton: Well, Dom, thank you for sharing your insights and for coming to the table.

Pappalardo: Thanks for having me. I really enjoy it.

Hampton: That wraps up this week’s episode. Thanks for watching and making this show part of your day. Subscribe to Morningstar’s YouTube channel to see new videos about investment ideas, market trends, and analyst insights. Thanks to senior video producer Jake VanKersen and associate multimedia editor Jessica Bebel. I’m Ivanna Hampton, lead multimedia editor at Morningstar. Take care.