Tariffied

Performance for Week Ending 4.4.2025:

The Dow Jones Industrial Average (Dow) fell 7.9 percent, the Standard & Poor’s 500 Index (S&P 500) lost 9.1 percent and the Nasdaq Composite Index (NASDAQ) finished off 10.0 percent. Sector breadth was negative with all 11 of the S&P sector groups closing lower. The Energy sector (-14.1 percent) led the decline followed by Technology (-11.4 percent) and Financials (-10.3 percent).

*See below for Index Definitions

MARKET OBSERVATIONS: 3.31.2025  – 4.4.2025

The S&P 500 finished the week sharply lower, posting its worst weekly loss since March 2020 when the broader market index fell by nearly 15 percent. Driving the losses was the Trump Administration’s release of the details around its reciprocal tariff program. While investors expected the new effective tariff rate to run between 10 to 15 percent, President Trump decided instead to take the nuclear option with the breadth and the magnitude of tariffs going well beyond what anyone was forecasting. Essentially the effective tariff rate will go from about 2.5 percent to north of 20 percent, resulting in the highest tariff levels in over 100 years. The market sold-off hard on the news as the new tariff scheme certainly raises the probability of a recession and, in turn, a Bear market in stocks. While neither outcome is guaranteed, the risk of both has gone up dramatically. On Friday, China retaliated by announcing they would impose additional tariffs of 34 percent on all U.S. goods beginning April 10. The magnitude of the tariff hike mirrored the U.S. move and is part of a broader set of countermeasures, including export controls on rare earth minerals and an import ban on goods from select U.S. companies. While there were very few winners in the equity market this week, safe-haven assets did well, with the benchmark 10-year Treasury note yields falling 26 basis points to 3.99 percent, the lowest since last October. Traders also upped their bets that the Federal Reserve will cut interest rates up to four times this year, with futures showing 99 basis points of easing by year-end.

Fed Speak: On Friday, Fed Chair Powell stated that the impacts of the Trump Administration's tariffs plans are likely to be larger than expected, with significant uncertainty remaining. Powell said that while the tariffs are likely to produce "at least a temporary rise in inflation, there is also a possibility that the effects could be more persistent." Powell emphasized the importance of keeping longer-term inflation expectations well anchored, though he acknowledged the path of monetary policy is uncertain. What is clear, he added, is that the Fed must assure that one-time inflation gains do not become an ongoing problem. Powell also acknowledged that there are risks to both sides of the Fed's dual mandate, with the possibility of higher inflation and higher unemployment. However, he suggested that uncertainty should be lower a year from now.

Earlier in the week, Fed Governor Lisa Cook said she sees slower economic growth this year and stalled progress on lowering inflation amid tariffs and other policy changes, but that policymakers should hold interest rates steady for now. Fed Governor Adriana Kugler said it’s appropriate to keep interest rates unchanged until upside risks to inflation abate, pointing to government policy changes, the recent lack of progress on cooling price growth, and rising inflation expectations. Kugler added that progress toward bringing inflation down to the Fed’s 2 percent target may have stalled and she flagged the upside risks associated with “announced and prospective policy changes.”

Economic Roundup: While the monthly payroll report is typically one of the closely watched monthly reports, this month’s release took a backseat amid the “tariff tantrum,” despite signaling a solid job market. The Labor Department reported that total nonfarm payroll employment increased by an impressive 228,000 in March, though the unemployment rate increased by 10 basis points to 4.2 percent as the labor force participation rate also rose. The reading exceeded consensus expectations, which had forecast net monthly job gains of 140,000 and a flat unemployment rate of 4.1 percent. Private payrolls grew 209,000, well above the forecast of 135,000.

Meanwhile, U.S. service providers expanded at the slowest pace in nine months, as order growth cooled and a measure of employment tumbled to the lowest since 2023. The ISM’s gauge of services dropped to 50.8 from 53.5 a month earlier, while its employment guage sank by 7.7 points—the most in nearly five years—to 46.2. Excluding the immediate post-pandemic aftermath, this was the largest monthly decline since a weather-induced slump in February 2014.

Lastly, U.S. factory activity contracted in March for the first time this year, while prices accelerated sharply for the second consecutive month, as the drumbeat of higher tariffs reverberated through the economy. The ISM’s manufacturing index declined 1.3 points last month to 49. Readings below 50 indicate contraction. Meanwhile, the group’s price measure increased to its highest since June 2022, marking a 14.5 percent increase over the past two months, the biggest 2-month rise in four years.

The Week Ahead: Tariffs will remain front and center in the week ahead, with country-specific higher rates scheduled to kick in on Wednesday. In Europe, EU trade ministers are expected to convene on Monday to discuss a response to US tariffs. Turning to the data calendar, which will be somewhat discounted given the upcoming tariff impact, the main release will be the consumer price index (CPI) for March on Thursday. According to Bloomberg, economists expect headline month-over-month growth to come in at +0.1 percent and core to print +0.3 percent. On a year-over-year basis, the headline CPI is forecast to fall to 2.6 percent (from 2.8 percent in February), while the core rate is expected to come in at 3.0 percent, down from 3.1 percent in the prior month. The producer price index (PPI) report is due on Friday. Also on Friday, an important update on sentiment will come from the University of Michigan’s consumer survey for April after a big decline in March. The report will also include updated 1-year and 5–10-year inflation expectations. First quarter earnings season will unofficially kick-off this week with reports due out from ten members of the S&P 500 including JP Morgan, Wells-Fargo, and Morgan Stanley. Consensus expectations for first quarter S&P 500 earnings is for 6.7 percent growth. Investors are also expected to listen closely to company managements for insights on potential policy pivots from tariffs during the first half of the year to deregulation during the second half. It will be a busy week for Fed speak with ten members of the central bank slated to speak. The Fed will also release the minutes from the March FOMC meeting on Wednesday.

— By Michael Schwager, Chief Market Strategist, Managing Director

Definitions

The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Wilshire 5000 Total Market Index^SM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm's headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board, or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.

Standard and Poor's 500^© Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

This material contains opinions of the author, but not necessarily those of Guggenheim Partners, LLC or its subsidiaries. The opinions contained herein are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. No part of this material may be reproduced or referred to in any form, without express written permission of Guggenheim Partners, LLC.