Review of the US Tariff Situation

The news for the last few months since the entrance of the new US administration has been hectic from a macroeconomic perspective on several fronts, with the period of US exceptionalism, at least temporarily, coming to a pause.

This fiasco was relatively predictable and is something I've been watching for the last 8 months or so. There are three major developments we've been paying attention to: obviously, the tariff situation; Canadian central bank interest rates; and US federal department cuts, particularly to the FDIC, which has great historical significance to the US and world economy.

I will comment on the latter two in the near future as I have been ahead of the curve on both for the last 8 months and want to maintain that status.

The tariff situation has largely subsided. I think this has become more of a situation of talking mouths now than an actual threat. The US administration has pulled back at every step of the way as backlash from the entire globe has entered the picture and the US GDP and stock market growth was negative in Q1 of this year. Tesla had also wrote to protest the tariffs as their company had been personally affected about 2-3 months ago, signaling another early sign of the tariffs subsiding. In short, none of the reasons for the tariffs hold up, but I won't comment on them here.

Our recommendation would have been, quite reasonably, to have engaged in trade negotiations, first, with an underlying threat (or in the case of Getting to Yes, their BATNA) of tariffs, which would likely have had the same effect without the downside.

I think an important takeaway from all this is that, although I did run a multiple linear regression analysis on 20 macroeconomic variables with the S&P 500 returns (ran an ARIMA model too, because of serial correlation) about 3 months back to quell concerns about the S&P 500 changing direction because of things like the yield curve (and none of them showed a significant correlation), there was a big reaction to the tariffs. So, why?

In short, I think the change in the S&P 500 pricing was clearly due to overreaction from investors. The real impact on US GDP was about -0.2% total[1] (not good, but not proportional either), and investors should have known for months that the Trump administration would implement the tariffs (considering that was consistent in the campaigning), but that information was clearly not reflected in the stock price leading up to the implementation. I believe that behavioral models of economic behavior are going to become increasing important over time and better at predicting the movement of prices than any of the indicator or econometric models.

Aside from that, the tariff situation has probably subsided, stock market volatility has decreased, and JP Morgan has decreased the likelihood of a US recession to 40%[2]. The US economy does have other problems it needs to deal with, especially going forward, such as the deportation situation which is not only going to hurt economic growth but has been poorly handled. I will also comment on the FDIC situation later, given its importance, and the situation with the Canadian central bank interest rates, of which, I apparently have infinite clairvoyance.

References

[1] U.S. Bureau of Economic Analysis. (2025, April 30). Gross Domestic Product, 1st Quarter 2025 (Advance Estimate). Retrieved from https://www.bea.gov/news/2025/gross-domestic-product-1st-quarter-2025-advance-estimate

[2] J.P. Morgan Research. (2025). What Is the Probability of a Recession? Retrieved June 17, 2025, from https://www.jpmorgan.com/insights/global-research/economy/recession-probability