Bracing for Impact

Timing: A Window of Opportunity… for Now. Unexpected wider and larger-scope tariff announcements have sent tremors through bond and equity markets, resulting in a brisk sell-off that signals investors’ caution. Companies, wary of the looming cost increases, are ramping up their activities in a bid to secure inventory before the higher tariffs take full effect. Recent months have witnessed record import orders as firms engage in a classic preemptive stockpiling maneuver. With an abundance of inventory to cushion the blow, the direct impact on retail pricing may be deferred by two-to-three months for consumers.

Magnitude: The Real Weight of Tariff Turbulence. Even as timing buffers offer a temporary reprieve, the magnitude of these tariff shocks looms ominously large. Both consumers and corporates have, over recent years, built up savings and resilience — stress-tested during the high inflation episodes of 2022. However, the numbers behind these tariffs tell a daunting story. In particular, the very high tariff rate of 145% imposed on Chinese goods is a stark cause for concern. While exemptions exist, early Goldman Sachs estimates indicate that substitutes are hard to come by for roughly 20-30% of these imports. For corporations that depend heavily on Chinese supply chains, this means that if the steep tariffs persist, businesses could face severe supply chain stress — a domino effect that would ripple outwards, affecting production schedules, profit margins, and ultimately, consumer prices.

Navigating a Dual-Edged Sword. The current scenario presents a dual-edged dilemma: on one side, the short-term deferral of higher costs due to preemptive stockpiling, and on the other, the potent risk of structural cost increases and supply chain disruptions in the medium to long term.

For consumers, the resilience built from prior periods of economic stress offers some comfort. However, once corporate inventories are exhausted and suppliers are forced to operate at the new cost levels, the anticipated surge in prices could quickly erode household spending power. It’s a classic case of deferred pain — the initial shock is absorbed by preemptive measures, but the real financial sting may come a few months down the line when the market adjusts to the tariff-imposed cost structure. Analysts will be keenly observing not only the immediate response from market participants but also the long-term adjustments in corporate supply chains. The adjustments, while potentially stabilizing in the long run, may trigger a period of volatility as the market adapts to a new, tariff-influenced reality.

What’s on the Radar? In conclusion, the dual factors of magnitude and timing in these tariff measures create a complex and unsettling landscape. For now, the strategic purchasing spree acts as a stop-gap measure, but once the buffer of abundant inventory is depleted, the full brunt of the tariff shock is likely to be felt. Investors and market participants will need to brace for a period of adjustment, watching carefully as supply chain stress and price increases set in over the coming months.

— Peter Wilke, CFA – Head of Tactical Asset Allocation, Global Asset Allocation

LIBERATION DAY SPIKE

The tariff announcements on Liberation Day increased expected volatility to levels of prior periods of market turmoil.

Credit Markets

A constant stream of headlines drove risk asset performance in March, as heightened uncertainty from seemingly daily shifts in tariff policy caused the S&P 500 to have its largest monthly decline since December 2022. Despite recent market stress, credit fundamentals and technicals remain solid. Credit metrics for high yield for the fourth quarter have showed modest improvements off an already strong base. High yield issuers saw its first decline in leverage in four quarters with 15 of 18 sectors experiencing improvement.

Leverage metrics remain well below the long term average. Interest coverage has also improved for the first time in more than two years. High yield spreads (as of 4/8/25) have hit their highest level since October 2023 at 453 basis points (bps). The historical median 12-month forward total return for high yield with an index OAS range between 400-500 bps is 6.2% with a median excess return of 3.7%. While volatility could continue to be elevated in the short term, historically this has been an attractive entry point for a longer investment horizon.

—Ben McCubbin, Co-Head of High Yield, Global Fixed Income

—Sau Mui, Co-Head of High Yield, Global Fixed Income

VALUATIONS AND FORWARD RETURNS

Wider spreads can lead to higher future returns.

Source: Northern Trust Asset Management, Barclays Research. Data from 6/30/1996 through 3/31/2025. HY = High Yield. Historical trends are not predictive of future results.

• Credit metrics for high yield in the fourth quarter have showed modest improvement off of a strong base.
• High yield spreads (as of 4/8/25) have hit their highest level since October 2023 at 453 basis points (bps).
• The historical median 12-month forward total return for high yield with an index OAS range between 400-500 bps is 6.2% with a median excess return of 3.7%.

Equities

Since the end of February, U.S. large caps have declined 16.4% through April 8. An already wobbly equity market saw uncertainty hit a fever pitch following tariff details from April 2. In that time, defensive sectors have significantly outperformed cyclicals. Meanwhile, within both defensive and cyclical sectors, low risk stocks outperformed high risk stocks by a wide margin as investors flocked to safety. This dynamic across and within sectors was seen outside of the U.S. as well. Developed ex-U.S. and Emerging Markets held up well until April 2 before taking a significant downturn as the tariff retaliation cycle evolved.

Earlier in the year, large cap U.S. earnings were expect to grow around 11% year-over-year. That number has been thrown into serious doubt, and we expect to see negative analyst revisions. But the situation is highly fluid. Absent a significant pivot in trade policy, we expect a bigger shock to the U.S. macro picture. Despite increased recession odds, with U.S. equities already down around 20%, we decided to slightly trim the overweight. We also initiated a 2% overweight to Developed ex-U.S. equities, as we continue to see better opportunities there following recent approval of fiscal spending out of Europe.

— Jordan Dekhayser, Head of Equity Client Portfolio Management

RISK-OFF TRADE ACCELERATES

Defensive stocks and sectors take the leadership mantle.

Source: Northern Trust Asset Management, MSCI. MSCI U.S. Sectors. Data from 2/28/2025 through 4/8/2025. Past performance is not indicative or a guarantee of future results. Index performance returns do not reflect any management fees, transaction costs or expenses. It is not possible to invest directly in any index.

• As risk picked up, defensive sectors and stocks outperformed during the sell-off.
• Developed ex-U.S. and Emerging Markets held up until April 2 when they too saw significant drawdowns.
• Despite increased recession odds, with U.S. equity markets already down around 20%, we slightly trimmed our U.S. equity overweight. We also initiated a 2% overweight to Developed ex-U.S. equities.