A Quick Rant on the Current Market Selloff

1.) A Quick Rant on the Current Market Sell-off

a.) In our discussions with clients, the most pressing question being asked is how far the current market sell-off can go. 

The truth is that without a material shift in policy towards curbing tariffs, there is still a lot of room to the downside for broad risk. 

Let’s contextualize what has happened so that everyone is on the same page here:

• The hub of the global trade and financial system (the US) has shifted to a level of protectionism not seen in over a century. The US now has an average effective tariff rate that is in sympatico with countries like Iran, Algeria and Sudan (none of those countries are known as liberalized markets).
• While tariffs are bad in general – what makes these brand of tariffs worse is the sheer unpredictability of policy. If you’re a business owner, you can game plan for 20% tariffs if you know they’ll still be there in a years time. Now? You’re likely not investing or hiring until you’re more certain.
• Also, broad tariffs means that businesses can’t shift or adjust supply chains as quickly. 
• Additionally, these tariffs are completely subjective and the decision to raise or lower them depends on one person – Donald J. Trump.

Again, if left unchecked, this is a MASSIVE macroeconomic shock on the scale that we haven’t ever seen before. I really HATE using hyperbole like that but that’s essentially what we’re dealing with unless the Trump administration changes its tune.

b.) Having said the above, I don’t think these tariffs can stay in their current form. There are four main corrective channels to watch for – US households + business sentiment, markets and congressional Republicans.

US household sentiment has already been tanking. And given the correlation of sentiment to equities, I’d suspect there’s more to go here. Additionally, tariffs are likely to be felt first in food prices – which won’t help the matter at all. 

Businesses will see a quick rise in input and funding costs. The former is due to trade frictions, and the latter is due to tanking equity markets. The most likely result of this is that investing plans are put on hold and workers lose their jobs.

Markets are already in a tail-spin. And the more the Trump administration digs its heels in, the less likely it is that things will stabilize.

Already, we are seeing signs of Republicans splitting on the issue of tariffs. For instance, Ted Cruz has warned of a midterm ​“bloodbath”, Elon Musk is turning on the rest of the Trump economic team, and there are now bipartisan efforts to rescind existing tariffs or restrict Trump’s ability to impose new ones.

c.) What is the end game here?

If history is any guide, then the general rule of thumb is that a decline of at least 20% from peak should trigger a policy response. As we head to the close for the weak, we’re around 17%.

From here, there are three likely outcomes:

• The Trump put (finally) comes into play. Based on what we heard from Trump, Bessent and Lutnick over the weekend, we’ll still need to see more destruction in value before there’s a change in heart or enough pressure internally via congressional Republicans.
• The Fed put comes into play. In the past, a rule of thumb was that a 20% drawdown from peak would be the point at which the Fed would intervene to stabilize things either operationally, or through communication. We’re currently at a 17% drawdown from the peak earlier this year – but the fact that core PCE is still close to 3% tells us that the Fed may not be as quick to soothe things this time around.
• Valuation adjusts to a level that a substantial portion of the market would gauge as ​“cheap”. The good news is that the S&P 500 forward P/E is currently around 18.8x – which is not that far off from the 17.8x it averaged between 2015-2019. The flip side to that is that the US economy was firmly in recovery mode during those years and far more liberal when it came to trade policy.

For now, the best hope we have is point i). But even then, it’s hard to envisage a complete reversal to the halcyon days of free trade. Instead, we might just get a shift from an average tariff rate of 20% to something like 10%.

Unfortunately, the pain will continue until morale improves.

2.) What About the Fed?

Fed Chair Powell’s speech and comments on Friday were important. If you read through his speech and focus on his answers, you’ll see a clear pattern of emphasis on the tariff passthrough to prices as opposed to growth. That is on purpose – largely because the market has been emphasizing the effect of the tariffs on long-term growth and recalibrating expectations for the Fed to ease more forcefully in 2025.

However, Powell’s comments that the Fed is ​“obligated to keep inflation expectations anchored” and ​“tariffs could have a persistent inflation impact” in the ​“coming quarters” serve to remind everyone that the current backdrop does NOT mean Fed cuts should be rushed.

That is what makes the current backdrop so much more complicated. If the Fed isn’t willing to cut rates as fast the market would like, and the Trump administration keeps doubling down on current policy – then there’s no choice but for the market to continue to reprice lower.

3.) Moving on from Tariffs…Did Friday’s Data Tell Us Anything New?

a.) In the US – the mix of data was generally constructive. Headline payrolls came in at +228k, with gains led by the healthcare and leisure/​hospitality sectors (primarily food services). For those wondering, federal government jobs declined by 4k on the month.

The unemployment rate did increase by a tick – but that’s largely due to rounding. If we round to two decimal places, the U/E rate went from 4.14% in February to 4.15% in March. Average hourly earnings were in-line with expectations (+0.3% m/​m) but slipped on a y/​y basis due to base effects. Real average hourly earnings are at 1.2% - or within the range seen over the past few years.

The fly in the ointment was the revision lower to the Jan/​Feb numbers, but even still, monthly job gains are still above the six-month trend. Of course, that will bear watching in the months ahead – especially as weaker sentiment data starts migrating into the ​“hard” data.

b.) In Canada – quite the different picture.

The household survey flagged a 33k decline in monthly jobs led by wholesale/​retail as well as information/​culture/​recreation. The drop was also driven by loss in full-time work, which declined by 62k on the month.

Regionally speaking, the majority of the job losses were in Ontario (-28k) and Alberta (-15k). The employment picture in both of those provinces will be flash points in the coming months for obvious reasons.

Looking ahead, employment in the goods sector (particularly auto manufacturing) will likely come under strain from the direct impact of tariffs. The indirect impact will be felt most proximately in services (retail, food services most likely).