By AKEMI KONDO DALVI, CPA/PFS, CFP
On April 30, President Trump reached the 100th day of his second presidency. During this time, Trump signed 143 executive orders. This is the most of any president historically. One of the most notable legislative actions has been the implementation of tariffs.
The on-again, off-again tariffs have created daily volatility in the stock market as investors try to digest the flurry of information and discern which tariffs will remain, and which may be negotiated away. Starting in February, Trump announced tariffs on America’s long time partners, Canada and Mexico, as well as China. In March, tariffs expanded to steel and aluminum imports, triggering a trade war with the European Union.
Then on April 2, now called Liberation Day, Trump declared a 10% baseline tax on imports from all countries, as well as “reciprocal” tariffs for dozens of nations that run trade surpluses with the U.S. In the weeks that followed, China and the U.S. went tit-for-tat, announcing counter-tariffs up to 145% (including the 20% fentanyl tariff). Additionally, China announced more export controls on rare earth materials used in high-tech products like computer chips and EV batteries.
As a result of all this uncertainty, the stock market tanked in April, causing the Nasdaq and S&P 500 to briefly enter bear market territory, or a 20% decline. Equally, or perhaps even more importantly, the inconsistent policy created global uncertainty about the U.S. This caused a rarely interesting part of the stock market to enter the spotlight, the U.S. bond market.
Governments sell bonds to raise money for public spending. As the stock market volatility increased, investors lost confidence in U.S. policy, and this was communicated through a drop in the value of U.S. bonds. In other words, because investors lost confidence in America’s economic direction, the U.S. government had to offer to pay a higher rate of return on their government bonds to entice investors to take on perceived higher risk.
This may not sound interesting at first glance, but the underlying message was alarming and it caused President Trump to change direction on tariffs. Initially, when tariffs were announced, equity markets lost value and investors fled into U.S. bonds for safety. However, as the global trade war ensued, Trump doubled down on tariffs, and China made no efforts to negotiate with the U.S.
As a result, investors began dumping U.S. bonds, viewing America’s stability as uncertain. Consequently, the yield on 10-year government bonds shot up from 3.9% to 4.5%, and 30-year bonds jumped to nearly 5%; a huge increase in a typically slow and uneventful investment category. This signaled that Trump’s tariffs had made international investors doubt America’s long-term economic leadership.
Stepping back, if the U.S. had to pay higher interest on government debt for a prolonged period of time, this could significantly affect ordinary Americans. The government might have to enact budget cuts and reduce public spending initiatives, as higher interest on debt would make it more costly for the government to sustain itself.
Further, if the government rates increased, other rates for lending would likely follow suit, meaning the lending rate for mortgages, credit cards, and car loans might also rise. Small businesses and low-income households would be most affected. However, this shift could potentially slow down the entire U.S. economy.
The stock market decline alone did not stop the president’s tariffs. However, the bond market weakening, and the warning sign of potential threats to jobs and the U.S. economy, frightened the investment community. It was reported that Treasury Secretary Scott Bessent fielded calls from business leaders that eventually made Trump pause.
Many do not realize that the largest holders of U.S. debt are actually the Japanese government, followed by the Chinese. Some speculate that China may have caused the U.S. debt sell-off in an aim to hurt the U.S. in the heated trade war. However, economists say this is highly unlikely, as selling off high volumes of U.S. debt in such a short period would have impoverished China.
For a moment in time, bonds were all that people could talk about. Market analysts tried to guess if the unusual and erratic movement in the bond market was foreshadowing trouble ahead. In today’s market, policy updates come like rapid fire, so nothing stays in the headlines too long before more pressing news vies for our attention.
Likewise, predictions about the future direction of the stock market evolve daily and stock market volatility has become the expected norm.
Therefore, consider an investment strategy that works through policy shifts and allows you to sleep at night. Diversification has never been more exciting!
The opinions expressed above are solely those of Kondo Wealth Advisors, Inc. (626-449-7783, info@kondowealthadvisors.com), a Registered Investment Advisor in the state of California. Neither Kondo Wealth Advisors, Inc. nor its representatives provide legal, tax or accounting advice.