Let's Make a Deal

As April wears on, we are beginning to get some clarity on trade negotiations: While the threatened reciprocal tariffs have been delayed for 90 days, the Trump administration has been busily meeting with our trading partners, many of whom are eager to strike a deal. With news that a trade deal with Japan may be imminent, and with the visit to the White House by Italian Prime Minister Giorgia Meloni signaling a potential thaw in negotiations with Europe, investors are starting to lower their temperatures. The best measure of that is not only the price action in markets but also in the movement of the VIX: The market volatility “fear and greed” index, which had been flashing bright red since Liberation Day on April 2, fell 20% this week to its lowest level since.

While trade deals may be underway with many major U.S. trading partners, investors are carefully eyeing the state of negotiations with China. Last weekend’s exemption of certain electronic and technology equipment imports was a good first step, but the rhetoric has remained intense on both sides since then. Notably, President Trump revealed Thursday for the first time that the U.S. is in discussions with China.

The relief offered to others, however, may not be offered to China, as the U.S./China rivalry is deep and beyond trade issues. We are forecasting a decoupling between the two nations, but the question remains whether it will be a soft or hard decoupling. Each outcome would have significantly different implications not only for the U.S. but also for the global economy.

We have been watching for any signs that trade issues have been pulled through to the real economy. We have seen strong signs of deep distress in the “soft data,” typically based on survey results, and the uncertainty related to tariffs is the root cause of anxiety: The breadth of the across-the-board tariffs will impact all households, so the probability that it will be pulled through the consumption channel is high. The uncertainty also drives a slowdown in investment and hiring activity at the corporate level, and this has been revealed in survey data. We will be watching carefully to see if and when this distress manifests in changes in real economic activity and, most importantly, in the labor market. The labor market has been the key support for consumer spending, which makes up 70% of U.S. GDP.

Adding complexity to the already complicated environment, we can anticipate that some of the near-term “hard data” may be noisy — we see an initial period of more aggressive inventory restocking as companies try to get ahead of what may be much higher prices going forward. So far, the news on the labor market remains positive, with weekly unemployment claims surprising to the downside. However, the Philadelphia Fed Index, another economic indicator that measures manufacturing activity in the mid-Atlantic region, fell to -26.4 — its lowest reading in over a year. This is much lower than the 3.5 expectation, and it signals contraction.  

Although the Treasury tariff tantrum from last week is now in the rear-view mirror, longer-dated Treasury yields remain elevated. While some have suggested this is an outcome of retaliatory selling by non-U.S. investors — by foreign central banks in particular — we see scant evidence that this is the driving force. It is more likely that the combination of budgetary uncertainty and continued trade policy unpredictability are providing a one-two punch to Treasury bonds, encouraging investors to demand higher yields to entice purchases.

There have been important movements in U.S. budget negotiations, but there are some major hurdles. Typically, the reconciliation instructions that the House and Senate use to align legislation are centered on a “baseline.” Traditionally, the baseline is based on current law. As such, because the tax cuts from the original Tax Cuts and Jobs Act (TCJA) legislation were set to expire this year, the reset in forward-looking revenue forecasts from this would be part of the baseline budget and would therefore require Congress to come up with an offset to be budget neutral. Instead, however, the Senate wants to use “current policy,” defined as permanence of the current TCJA tax cut as the baseline. Thus, the extension of the cuts  —  and its estimated cost of $4 trillion over 10 years  —  won’t increase the current deficit on paper. This budgetary sleight-of-hand may be walked back in subsequent negotiations, but investors are watching closely and are unlikely to be fooled. The overall concern for a continuation of the current level of deficit spending may be partly responsible for the stubborn elevation of the 10-year Treasury yield. And, of course, the tariff uncertainty and more persistent global polarization may contribute to a higher political risk premium, and ultimately higher U.S. interest rates. 

Answer provided by Pam Lucina, Head of Family Office Solutions for Northern Trust’s Global Family Office

As we navigate tariff and market uncertainty, we are also awaiting details on several pending tax bills. These include one bill that could repeal the estate tax, and another that could bring back the top 39.6% income tax bracket for taxpayers with more than $1 million in income. As we wait for Congress to finalize tax legislation — which will likely be this summer — the trajectories of tariffs, tax legislation and markets remain uncertain. There are, however, several planning strategies that can be advantageous in these murky conditions.

Plan, don’t predict — and don’t panic. Take advantage of market volatility and potentially higher future income tax rates with these wealth planning strategies.

• For those rebalancing their portfolios, consider tax-loss harvesting. Recognizing capital losses now makes them available to offset capital gains in this or future tax years.
• Consider deferred compensation elections. With the possibility of higher income tax rates in the future, now may not be the optimal time to defer income.
• Consider converting your traditional retirement account to a Roth IRA. Lower valuations today reduce the cost of the conversion, and doing so now allows you to avoid potentially higher income tax rates in the future.
• Make gifts of assets with depressed market values if you have not used your gift tax exemption, which was increased by $380,000 per taxpayer and $760,000 per married couple for 2025.
• If you have previously made intra-family loans, consider an opportunity to gift — without impacting your current cash flow —  by forgiving all or part of the loans.
• Lower market valuations make this an opportune time to consider exercising swap powers over existing grantor trusts to maximize the potential value growing outside your estate.
• Defer paying gift tax. With a potential repeal of the estate tax or increased exemptions on the table, now is not the time to pay gift tax. Instead, focus on wealth transfers that do not incur gift tax, such as freeze techniques like transfers to grantor-retained annuity trusts and sales to grantor trusts, or intra-family loans and charitable giving.