President Trump has long been a voracious proponent of tariffs, which has been central to his ‘America First’ economic and trade policy. Tariffs were a cornerstone policy in his re-election bid, which similarly followed his prior administration’s intense affinity with tariffs.
This attraction to tariffs is rooted in a protectionist mindset and is underpinned by the following core beliefs that tariffs imposed by the US can:
- correct persistent trade deficits and promote the consumption of American-made products
- protect their domestic industries and jobs at the expense of offshore competitors
- bolster their national security through a reduced reliance on foreign countries and fortifying domestic supply chains
- extract concessions from other countries through negotiating leverage, and
- generate revenue to fund tax cuts.
There are weeks where decades happen
Although Trump campaigned strongly on implementing tariffs, it was the flurry of announcements, and the surprisingly punitive tariffs applied across all trading partners that shocked the market.
As the above chart highlights, the velocity of information that the market was grappling with severely fractured investor confidence and delivered a white-knuckle ride for markets. The peak was ‘Liberation Day’, where a sweeping swath of ‘reciprocal tariffs’ was announced, which included a 10% baseline tariff and higher country specific tariffs too.
Manic Monday
For the Australian market, this culminated in ‘manic Monday’ on 7 April 2025. The ASX200 index plummeted in response to escalating global trade tensions, marking its worst day of trading since the COVID-19 pandemic began in March 2020. The index, having fallen as much as -6.5%, finished the day down -4.5%.
This relentless drumbeat of daily negativity was driven by tangible fears of global supply chains grinding to a halt. Investors fretted over visions of empty ports, paralysed shipping containers, and the looming possibility of empty shelves in shops. The tariffs, particularly between the US and China, were expected to result in an effective trade-embargo between the two countries. The downturn from this reflected broad concerns around the globe over the potential economic impact of a prolonged trade conflict.
A tale of two halves
Consequently, the pressure was building on the Trump administration to announce a compromise. Although the stock market decline would’ve undoubtedly factored into Trump’s decision to pause, it’s been suggested that the walk-back was ultimately driven by the ‘three B’s’:
- Bonds: Fixed income markets were showing signs of dysfunction, with yields plummeting only to unexpectedly jag higher. Note that higher bond yields make servicing the US debt more costly.
- Base: The Republican base, despite being generally supportive of Trump’s trade stance, was beginning to feel the ripple effects through to their 401(k) retirement accounts (similar to our superannuation accounts).
- Business: Business groups, whose profits and supply chains were directly threatened by an escalating trade war, were exerting immense pressure on the administration to de-escalate.
@realDonaldTrump on Truth Social – “THIS IS A GREAT TIME TO BUY!!!”
At this point, the market was primed for a full-blown trade war and the prospect of real-world economic disruption. Then, on the morning of 9 April 2025, amid widespread financial anxiety came a soothing message from Trump himself that it was "a great time to buy."
The subsequent announcement of a 90-day pause acted as a crucial circuit breaker to this escalating anxiety. US equities swiftly staged a phenomenal rally, with the S&P 500 soaring 9.5% in a single session.
This rebound caught many investors wrong-footed, especially those who had bearishly positioned their portfolios for what they believed was the imminent breakdown of global trade. Importantly, up until this point, the Zenith Portfolio Solutions team had engaged in extensive discussions as to whether we should de-risk our portfolios.
Ultimately, given the elevated volatility and a lack of visibility over a potential trade war resolution, we opted to stay invested through this period. And although we elected not to make any tilts, we remained highly attuned to the risk of further deterioration in economic fundamentals, and lay waiting to act if necessary.
TACO Trade (‘Trump Always Chickens Out’)
The subsequent market rally has given birth to a new financial acronym that has recently gained traction – the TACO trade (‘Trump Always Chickens Out’). The thesis here is that Trump has a tendency to apply maximum pressure with extreme threats that push a crisis to its brink. This causes significant volatility, and markets aggressively sell-off.
After securing some concessions or feeling significant domestic pressure from falling markets, Trump de-escalates and share markets again, grind higher.
The 'TACO trade' thrived because it leveraged the market's reflexive drive to ‘buy the dip'. This isn’t a new behaviour, but the application of a time-tested and highly profitable habit. After more than a decade of short-lived corrections and swift, policy-fuelled recoveries, investors had learned that panicking was a mistake and every sell-off was a prelude to a rally.
Is this time different?
Investors should be wary, as blindly buying this dip carries new risks. Unlike past technical corrections, a prolonged trade war threatens to inflict fundamental economic damage - disrupting supply chains and corporate earnings in a way that monetary policy cannot easily fix. It's precisely this level of complexity that underscores the benefit of professional portfolio management.
In today's landscape, where old reflexes can lead to suboptimal portfolio outcomes, disciplined analysis is required to distinguish between a fleeting opportunity and a fundamental downturn. This heightened uncertainty makes expert guidance crucial for managing risk and identifying genuine investment opportunities.
Portfolios that ‘zig’ when the market ‘zags’
Over the last couple of years, we‘ve methodically increased our exposure to Bonds and may look to build upon this should yields continue to creep higher. Within our equity allocations, we remain favourable on parts of the market we deem undervalued, such as global small caps, and on assets that should perform well in an environment of elevated inflation, like Real Assets.
This strategic tilt is part of our broader commitment to a well-diversified portfolio, built with complementary levers designed to protect capital during a downturn while ensuring we’re positioned to participate in further market gains. In this environment, our client portfolios remain battle-tested to withstand the vagaries of ‘tariff roulette’.
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