Tariff Shockwaves: Impacts on Markets, Inflation, and Investment Strategy - 4/3/2025

In this special midweek episode of Paramount Wealth Perspectives, host Chris Coyle and Chief Investment Officer Scott Tremlett discuss the unexpected and historic tariff increases announced this week, analyzing their economic impact and potential retaliations from global markets.

Scott explains how the tariffs—pegged to bilateral trade deficits—could drive inflation higher, potentially pushing CPI to 4.5% in 2025 before gradually declining. They also explore the implications for the U.S. labor market, including immigration slowdowns, rising jobless claims, and the possibility of negative GDP growth in the second quarter.

Scott offers insights on how these economic shifts may influence the Federal Reserve’s decisions, including potential rate cuts later this year, and the possibility of fiscal stimulus if the economy continues to slow. Finally, they discuss critical portfolio management strategies, emphasizing the importance of diversification, international investments, and avoiding over-concentration in U.S. stocks.

Whether you’re a seasoned investor or trying to stay informed, this episode provides valuable guidance for navigating a rapidly evolving economic landscape.

Transcript

Chris Coyle: 0:00

Intro song

0:12

Hello everyone. Welcome to Paramount Wealth Perspectives, your go-to podcast for the latest updates on global markets and current economic events. This is your host, Chris Coyle. I am the marketing director and financial advisor here at Paramount Associates Wealth Management. And today I'm joined by Scott Tremlett, the Chief Investment Officer here at Paramount Associates Wealth Management. Today we are doing a little bit of a special episode. It's a midweek episode in response to the announcements yesterday. So today I've prepared some questions to ask Scott, and I'm interested to see how he's going to answer them. First question I wanted to ask you, Scott, is what were the expectations around the tariff announcements and how in reality did they differ? Game on. Well, thanks Chris. I appreciate you putting this together. I've been in conferences since five 30 Mountain Time this morning, so I wanted to make sure we get this out timely and share the information that I have gone over here. I mean, guess going into this announcement, really the baseline for tariffs on US Goods globally was 2%. And most analysts, including me, expected a moderate increase in global tariffs of about 10% on top of the two, so that'd be about 12%. The actual calculation has really surprised. Markets and tariffs were really pegged to bilateral trade deficits. For example, Europe's average tariff on US goods is estimated about 2.7%, but the US trade deficit with Europe. Was used as justification to massively raise rates over 30%, creating the highest tariffs since 1904. This is like one company deciding to penalize its supplier because they spent more with them than they sold. Like this, let's say two companies do business with each other and Business two sends 75% more business to business. One, to make it even business Two charges a 75% tariff on business one. The next time business one makes a purchase. To me, this is flawed in a very aggressive strategy. We will see on retaliations, but major retaliations would hurt foreign countries more than the us. Let's say, for example, that a country decides not to buy treasuries or dollars, and then the dollar loses value. Well, that really hurts foreign exporters. I do expect retaliations to come, but we'll see on the speed and the scale. Yeah, Scott, I'm definitely interested to see about potential retaliations. I'm sure that they will come, as you mentioned, but we will see on the scale. And I have to say personally, I, I thought that the tariffs surprised me. I was expecting them to be a bit lower, and I think we saw that in the markets today. Absolutely. The next question I wanted to ask was, how do these tariffs intersect with the US labor market and immigration trends? Let's start with the good news. The good news is that the US economy as a whole is still in a good place. Wages are growing and the job market is still pretty tight. I know there are 300,000 government workers who have lost their jobs, but the US also creates 150,000 jobs a month. So in theory, that's just two months of hiring, and there is still on paper more than one open job for each unemployed worker. But this is an issue of timing. The economy was already slowing down. A deeper concern lies in the immigration slowdown. If net immigration drops to say 500,000 a year and 250,000 workers are deported, the US labor force will only grow by 250,000 workers a year. This compares to 1 million workers a year that we are previously adding. Combining that with retiring baby boomers, this could create a labor shortage that pressures wages, and does stifle growth. We're also seeing early signs of weakness in the job market. As of today, continuing jobless claims are rising, suggesting hiring may be cooling. I thought going into this, that the first quarter, GDP would be slightly positive. From here. We could see a negative GDP in the second quarter. I would definitely be interested to monitor how the GDP report will unfold. I know right now they have penciling in a 0.3% projection in the first quarter of this year, which would definitely be a slowdown from the 2.4% that we saw in 2024. Next question, Scott, I wanted to hit on is how might these tariffs and economic shifts affect inflation? The Fed's next moves, and finally, fiscal stimulus in the United States. Sounds good. Uh, let's start with inflation. Before yesterday, I had really considered CPI or consumer inflation increasing to about. Three, 3.5% in 2025 after yesterday, the one time inflation spiked it from tariffs. We could see CPI pushing forward to 4.5%. Either way, I do feel like inflation will slowly fall. To 2.5% by the end of 2026 as base effects and global adjustments do work through the system. Let's move to the Fed. The Fed was definitely uncertain before I had actually questioned whether we would see any cuts this year, and now the markets are pricing in three rate cuts this year with the first possibly in June, particularly if unemployment claims increased dramatically. Lastly, fiscal stimulus in the us. Any further slowdown, let's say a quarter two negative GDP print may accelerate fiscal stimulus or tax cuts. The greater the slowdown, the greater the tax cuts, and there are potential doge dividends to Americans. The Doge dividend would help us bounce off of any weakness but do remember the inflation risks that were created last time when we did stimulus and had supply chain problems. Yeah, I'm sure everyone remembers those pesky supply chain problems and trying to get a car after Covid or anything like that. Um, and I'd, I'd agree with you, Scott, in that certainly if the unemployment rate rises, that will increase the likelihood of the ever data dependent Federal Reserve on any decision that they may make. Next question and final question I wanted to ask Scott, is what does this mean for investors and portfolios right now? Well, let's start with again. Good news is that the US economy as a whole is still in a good place. My greatest risk, however, going into 2025, was a simple fact that everyone is invested in the same stocks. And when that happens, you can see dramatic swings in times of uncertainty. Right now, portfolio response. It's time to stay structured. I do feel like this is a year potentially of repricing of US assets and tariffs as they stand now on paper. All of this is more impactful to the US than foreign countries, and we may have more room to go on the negative as US equities still trade at 20 times earnings down from 22 times to start the year. Sure, but still above historical 16 times average earnings growth expectations have dropped from 12% to 8% already. But let's not forget about international markets. International markets are outperforming. They outperform today and in the future. International investments can be helped by offsetting fiscal stimulus to boost domestic demand, and a focus on trading with each other and maybe not the us. There's also an opportunity for foreign markets to attract investors looking to reduce US stock investments. It does seem like the strong dollar narrative may be breaking and dollar weakness today is definitely in response to lower US growth expectations, longer term trend, uh, it's still to be determined. Diversification really for portfolio structures is the key. Avoid over concentration in mega cap US names. Make sure you include international. Make sure you include alternatives. Make sure you include non-correlated assets and be cautious when everyone owns the same stocks. Volatility does spike position for eventual upside. But with a risk managed balance. Now, believe me, we will have roaring markets again, but in the interim, balance in portfolios will be key. I totally agree with you, Scott. I think during times of uncertainty, diversification is key and you pointed out some great ways to diversify, whether that is international markets or alternative or non-correlated assets. So I really appreciate you taking the time here, Scott, to share your insights. I want to take the time to thank all of our listeners for tuning in But for now, stay informed. Stay ahead and join us next time for more key updates shaping the global economy.