A Brief Note On GDP, Tariffs, and Diversification

Businesses loathe uncertainty. It paralyzes behavior, raises cost, and either pulls forward or pushes out transactions. This is precisely what we’ve seen to date. As tariffs go into effect, the Federal Reserve Q1 GDP estimate swung from +2.3% to -2.8%, sparking recession fears. Let’s take a moment to unpack the key data points around the GDP model, the tariff impacts, and market reactions.

Let’s start with the bottom line: discipline and diversification, in our view, are the optimal way to deal with uncertainty and manage risk. Through March 3rd, International markets beat the U.S. by 10%. Emerging markets and bonds show similar results to a lesser extreme, and quality has outpaced the riskier areas of markets. Here is a chart showing the various markets through March 3rd:

The Gross Domestic Product (GDP) estimates swung to show contraction in Q1. To calculate GDP, we look at spending by consumers, businesses, and the government. We then look at trade. The economy is now projected to shrink in Q1 because of global trade. We imported $153.3 Billion more than we exported, a record trade imbalance for the U.S.

• In practice, it’s a negative swing because countries bought fewer U.S. goods (exports) and business leaders stockpiled inventory (imports) before tariffs went into place.
• Consumer spending reflects approximately 70% of total output, but trade imbalances can vary dramatically quarter to quarter and swing the calculation, as we just saw.
• With companies pulling imports forward to January and February, we can expect next quarter's trade to surprise us to the contrary.

Tariffs and trade wars historically create uncertainty, taxes, and drag on the economy. It starts with the uncertainty, which is often the worst part of the process.

• The 2018 trade war pushed supply chains closer to home (from China to Canada/Mexico) after a volatile end to 2018 and COVID. Now, business leaders must optimize for shareholders amidst new trade war uncertainty.
• Tariffs have declined slowly since the 1930’s, and the average overall tariff has been 0-5% since the late 1980’s. As of March 4th, the average tariff is back to 1930’s levels. It remains to be seen whether this is negotiation or not.
• With the reciprocal tariffs immediately added (uncertainty), the Yale Budget Lab projects an average cost increase of $5,400 per middle and upper class household (a tax), inflation north of 3% long run (a tax), and GDP growth at 1.5% lower (the drag). Still growth, though with new headwinds.
• Historically, global stock markets are correlated, meaning stock markets generally move in the same direction in varying degrees. If the tariffs stay in place, we can expect correlations to decline and markets to move more independently of one another. This may increase the importance of a diverse portfolio mix (as shown in the first bullet point).

As we close out the quarter, remember that your personal headlines and plans take priority. We perpetually work to match your plan with portfolio mix. It is impossible to consistently predict who the winners are, when they will win, and where they will come from, just as we have seen to date in 2025. Diversification, as we started in our January commentary, is most helpful because it increases the chance you’ll own the winners whether the crisis of the day is a trade war, an actual war, or another form of uncertainty.

Sources: Ycharts.com, ATL FEDnow, The Budget Lab "The Fiscal, Economic, and Distributional Effects of Illustrative “Reciprocal” US Tariffs", First Trust "Recession Alert".

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