3/7/25: Markets Whipsawed by Trump’s Tariff Policy

Markets were whipsawed this week by President Trump’s tariff policy announcements, triggering the most significant trade war in decades. Early in the week, the Trump administration announced that tariffs would go into effect on March 4^th, with a 25% tariff on goods imported from both Mexico and Canada (except energy at 10%). Additionally, tariffs on goods from China were doubled to 20% from the 10% previously announced. Equity markets plunged on the news, and a flight to quality ensued with U.S. treasury yields plummeting and the curve steepening. All three countries threatened retaliatory tariffs in response.

Subsequently, President Trump announced a one-month delay in automobile tariffs for Canada and Mexico, temporarily calming markets before another nosedive in the equity markets. He then broadened the exemption to all Mexican and Canadian goods covered by the United States-Mexico-Canada Agreement (USMCA) from the 25% tariffs until April 2^nd when he is expected to announce broader duties on countries around the world. Markets were rattled as concerns of escalating inflation and slowing economic growth mounted.

The most significant economic release this week was the February employment report, which provided evidence of a softening labor market. Nonfarm payrolls rose by 151,000 in February, slightly lower than the consensus of 160,000 jobs, and the last two months were revised down by 2,000. Gains were led by education and health services, transportation, and financial activities, with cutbacks in federal jobs and consumer-oriented fields such as leisure and hospitality and retail. Average hourly earnings ticked up to an increase of 4.0% year-over-year in February from 3.9% in January. The unemployment rate rose to 4.1% from 4.0% as the labor force shrank. The most significant move was in the U6 underemployment rate, which includes those who are marginally attached to the labor force and employed part time for economic reasons. The measure soared to 8.0% in February from 7.5% last month to its highest level since 2021, as more discouraged workers experienced longer separations from the labor market.

By the end of the week (at this time of this writing), the Dow Jones Industrial Average was down approximately 2.5% for the week, and the S&P 500 fell about 3.3% during the week. NASDAQ entered correction territory as prices fell over 10% from peak levels primarily due to a selloff in large technology and artificial intelligence companies. The 2-year U.S. Treasury yield rose about 2 basis points to 4.01%, and the 10-year U.S. Treasury yield increased 11 basis points to 4.32% after some wild swings during the week, resulting in a steeper yield curve. The market is now pricing in three 0.25% rate cuts by the Federal Reserve this year.

The Chandler team expects the Federal Reserve to pause at the upcoming March meeting, but to begin lowering rates later this year as economic growth slows. Given significant market uncertainty regarding the impact of rapidly changing fiscal policies, we believe it is more important than ever to remain disciplined with our investment strategies.

Next week: NY Fed 1-Year Inflation Expectations, NFIB Small Business Optimism, JOLTs Job Openings, MBA Mortgage Applications, CPI, PPI, Federal Budget Balance, Jobless Claims, Household Change in Net Worth, University of Michigan Sentiment

© 2025 Chandler Asset Management, Inc. An Independent Registered Investment Adviser. All rights reserved. Data source: Bloomberg, Federal Reserve, and the US Department of Labor. This report is provided for informational purposes only and should not be construed as specific investment or legal advice. The information contained herein was obtained from sources believed to be reliable as of the date of publication, but may become outdated or superseded at any time without notice. Any opinions or views expressed are based on current market conditions and are subject to change. This report may contain forecasts and forward-looking statements which are inherently limited and should not be relied upon as an indicator of future results. Past performance is not indicative of future results. This report is not intended to constitute an offer, solicitation, recommendation, or advice regarding any securities or investment strategy and should not be regarded by recipients as a substitute for the exercise of their own judgment. Fixed income investments are subject to interest rate, credit, and market risk. Interest rate risk: The value of fixed income investments will decline as interest rates rise. Credit risk: the possibility that the borrower may not be able to repay interest and principal. Low-rated bonds generally have to pay higher interest rates to attract investors willing to take on greater risk. Market risk: the bond market, in general, could decline due to economic conditions, especially during periods of rising interest rates.