Tariffs Redux

October 13, 2025

Financial Markets

U.S. financial markets were moving at a comfortable pace last week until tariffs raised their ugly head again. Before Friday’s sell-off, markets were focused on whether the Federal Reserve would lower interest rates at its next meeting—and if so, by how much. Investors were also considering how much influence President Trump’s latest Federal Reserve nominee might exert on the rest of the committee. Then tariffs reared their ugly heads once again, and the S&P 500 posted its worst session since the early April “Liberation Day” selloff.

The silver lining is that President Trump has made similar threats in the past that ultimately proved to be negotiating tactics. As of this morning, the President has already signaled a desire to ease trade tensions. While such brinkmanship has not always led to lasting damage, these recurring threats create unnecessary volatility and could have far-reaching economic and market consequences if they escalate further.

Economics

The week’s dominant economic theme was once again the intensifying tariff standoff between the United States and China. If this dispute unfolds like prior episodes, the immediate damage could be limited—but the potential for long-term disruption remains significant. The uncertainty has already begun influencing business planning and investment decisions.

Trade experts and diplomats in Washington are now exploring how a sustained shift in U.S. trade policy could reorganize global commerce into new regional blocs. Under this emerging framework, the U.S. could remain dominant in a North and South American trading zone, while China consolidates leadership across much of Asia. Meanwhile, an unexpected resurgence of economic cooperation may be developing across the Mediterranean and into Africa—driven in part by Gulf nations like Saudi Arabia and the United Arab Emirates. Once heavily reliant on oil, these economies are rapidly transforming into modern, diversified trading hubs.

The current administration’s shift towards a more transactional approach, viewing trade as a zero-sum game, has encouraged other nations to seek new alliances, thereby accelerating the formation of alternative trade systems. The longer this continues, the more it risks eroding America’s traditional leadership in global commerce.

We applaud the cease-fire efforts and the recent hostage release between Israel and Hamas. While not directly affecting the economy or markets, last week’s progress toward peace in the Middle East is a welcome and encouraging development.

Conclusion

The U.S. economy remains in a somewhat paradoxical position. GDP growth is holding up, but job and income gains have begun to soften. Higher-income household consumption and AI-related investment continue to drive much of the economic momentum, while broader wage growth has lagged. The Federal Reserve’s efforts to lower interest rates may help ease some of this imbalance, though new tariffs could offset any progress by increasing costs and dampening sentiment.

For now, we see no imminent signs of a significant economic slowdown, but the risk of policy-driven shocks remains high. As the global trading system adjusts to a new reality, investors should avoid treating these developments like short-term political theater. The evolving structure of world trade carries real, long-term implications for markets and the global economy alike.  The elevated levels of equity market valuation and concentration only serve to magnify investor reaction to negative surprises.

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