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On the morning of December 26, 2004, a massive undersea earthquake — one of the strongest ever recorded — struck off the coast of Sumatra, Indonesia. In the immediate aftermath, there was little sense of the devastation to come. The true destruction unfolded hours later, as tsunami waves surged across the Indian Ocean, striking coastal communities with little warning and overwhelming force. What began as a sudden seismic event quickly evolved into one of the deadliest natural disasters in history, with its full impact only understood as the waves rippled outward.

In a similar way, President Trump’s announcement on April 2^nd of the largest tariff increases in over a century feels like an economic earthquake of a magnitude not seen since COVID. The initial shock has been delivered, but the true consequences are still forming beneath the surface. Just as the tsunami’s waves took time to reach distant shores, the effects of these sweeping tariffs will ripple through supply chains, consumer prices, and global markets in the weeks and months ahead — with outcomes that are, at this moment, largely unknown.

Trump’s Tariffs – Economic Chaos or Grand Strategy?

President Trump’s goal is to bring manufacturing back to the United States — an industry that was hollowed out after China joined the World Trade Organization (WTO) in 2001. Within a decade of China’s entry, the U.S. lost about one-third of its manufacturing workforce, and it has never fully recovered. For nearly half a century, the U.S. maintained between 16 and 20 million manufacturing jobs, but since 2001, that number has steadily declined, as shown in the figure below.

(Click on image to enlarge)

Source: Bloomberg, Financial Sense Wealth Management

A recent presentation by Michael Cembalest, Chairman of Market and Investment Strategy at J.P. Morgan, sheds light on what Trump is trying to fix ("Chaos vs. Grand Design: Trump 2.0 for Investors"). One of his charts shows U.S. consumer spending, Gross Domestic Product (GDP), and industrial production (a key measure of manufacturing output) over time. For more than 70 years, these three indicators moved in lockstep. However, after China’s WTO entry, U.S. manufacturing diverged — falling behind even as consumer spending and GDP continued to rise.

You can see the evidence in cities like Detroit and other once-thriving manufacturing hubs, now marked by decay and economic decline.

While American consumers did benefit from lower prices for goods made in China, the cost was high; the decline in manufacturing jobs coincided with a surge in opioid addictions, rising suicide rates, and falling manufacturing wages relative to the service sector.

We also saw the consequences during the COVID-19 pandemic, when the U.S. was heavily reliant on foreign countries like China and India for medicines and personal protective equipment. Simply put, the U.S. no longer produces many essential goods at home.

To illustrate how fragile our manufacturing capacity has become, Mr. Cembalest points to data showing that it may now take anywhere from 2 to 18 years to replace critical U.S. munitions transferred to Ukraine.

This raises a serious question: how could the U.S. respond to a strategic threat, such as a potential Chinese invasion of Taiwan, if it takes years to rebuild critical military supplies?

Measuring the Damage

Following President Trump’s tariff announcement, Wall Street economists are quickly raising their recession forecasts. They now expect negative real GDP growth for the next two quarters — and possibly for the first quarter as well, given the surge in imports as businesses rushed to beat the tariffs.

Just like the full impact of the 2004 earthquake wasn’t immediately clear, it’s difficult today to fully predict the economic consequences ahead. Key questions remain:

• How much will businesses pull back on capital spending?
• How will that impact overall business income?
• Will companies freeze hiring?
• What will be the level of retaliation from China or others?

Returning to the earthquake analogy, the longer Trump’s "tariff earthquake" continues, the greater the damage could be. Just as a prolonged earthquake releases more energy and stresses structures until they collapse, extended tariffs strain global trade and supply chains.

The United States is the world’s largest economy, and the sudden imposition of tariffs at this scale could cause the most severe disruption to global trade since COVID. That’s why quickly negotiating new trade deals — and lowering tariff rates — is critical.

If not, we risk eroding the few remaining supports holding up the U.S. economy and tipping into a recession. DOGE (the Department of Government Efficiency) is attempting to identify areas of fraud, wasteful spending, and reverse the high levels of recessionary spending seen under the Biden administration that kept the economy afloat. Meanwhile, high-end consumers — who helped sustain overall retail spending — are likely to pull back after recent stock market losses.

Typically, a recession drives the budget deficit up by 4–5% of GDP. With the deficit already running at 7% of GDP, a downturn could push it to 11–12% — higher than the 10% seen during the 2007–2009 Financial Crisis, and second only to the 18% during the COVID-induced recession.

Investors Stop Panicking When Policy Makers START Panicking

Looking back over the last quarter century of stock market volatility reveals that investor panics are often followed by policymaker panics, whose stimulus halts the market’s decline and sparks a renewed bull market. This pattern—where a market decline and a spike in volatility are countered by stimulus—is illustrated below, with the S&P 500 at top and the Volatility Index (VIX) at bottom. The largest spikes in the VIX (2008/2020) resulted in the largest fiscal and monetary stimulus responses while milder panics led to more measured stimulus.

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Source: Financial Sense Wealth Management, Bloomberg. Note: Indices are unmanaged and cannot be invested into directly.

On Monday, April 7th, the VIX spiked to 60 — a level rarely seen — and markets began to stabilize after an extremely volatile session. While VIX levels this high are often associated with major buying opportunities, they usually require a catalyst: a clear policy response. At present, we have neither — which is why holding cash remains crucial.

Federal Reserve Chairman Jerome Powell gave a speech on Friday that offered little sense of urgency, even as markets increasingly priced in rate cuts. On April 1st, markets expected three rate cuts this year; by April 7th, expectations rose to nearly four.

Without a monetary response, the Trump administration remains the market’s best hope. A potential catalyst would be Trump suspending the tariffs for 90 days to allow negotiations and ease uncertainty. However, administration comments have downplayed that possibility, with the tariff deadline of April 9th still in place. There have been leaks suggesting Trump may offer tax cuts to exporters hurt by retaliatory tariffs, but nothing definitive yet.

Outlook and Strategy

Markets are extremely oversold and primed for a relief rally. However, the strength and duration of any rally will depend on a policy shift from either the Fed or the Trump administration. Without such a pivot, the upside for stocks appears limited — which is why we remain cautious.

Goldman Sachs’ economics team is likely to make a U.S. recession its baseline forecast if tariffs go into effect on April 9th without a policy response. U.S. financial markets would likely continue to struggle.

Internationally, however, some countries are already preparing stimulus to soften the blow. Spain unveiled a $15.7 billion plan to protect industries from tariffs, and China’s policymakers are considering accelerating stimulus efforts. This could allow foreign markets to outperform U.S. markets, especially given stronger fiscal support abroad.

Capital tends to flow where it’s best treated. We may be witnessing a major shift in global capital flows, first sparked by the Biden administration’s weaponization of the U.S. dollar and SWIFT system during the 2022 Russia-Ukraine conflict, and now accelerated by Trump's tariff policy.

The US Dollar Index peaked in 2022, and since then, the S&P 500 has made little progress relative to foreign stocks. More importantly, the outperformance of U.S. stocks relative to foreign stocks is on the verge of breaking a trend that has been in place since coming out of the Great Financial Crisis of 2007-2009 (see blue trend line below).

Looking at a long-term chart of the relative performance of the S&P 500 relative to foreign stocks shows that U.S. stocks tend to outperform (rising line in top panel) when the Dollar Index rises and tend to underperform when the Dollar Index falls (falling line in top panel). U.S. stocks greatly outperformed in the 1990s during the technology bubble and from 2009-2022 as shown by the green shaded regions. The last great period of underperformance came in the 2000s as the technology bubble burst and the Dollar Index plummeted as the U.S. budget deficit blew out from funding the post 9-11 terrorist attacks.

(Click on image to enlarge)

Source: Financial Sense Wealth Management, Bloomberg. Note: Indices are unmanaged and cannot be invested into directly.

As mentioned previously, a U.S. recession could see the budget deficit blow out to double-digits which would likely cause Treasury debt issuance to surge and put downward pressure on the dollar and likely lead to further underperformance of the U.S. stock market relative to foreign stocks. Just as the Biden administration’s weaponization of the dollar and SWIFT payment system led to a peak in the dollar and a shift towards central banks gravitating to gold, the Trump tariff policy may further shift global capital out of U.S. financial assets. This is why our firm is looking to use the current global sell-off as an opportunity to scoop in and increase our exposure to foreign stock markets where there is more fiscal and monetary stimulus to support their financial markets. This new focus in the portfolios would complement our existing anti-dollar exposure we already have with our precious metals holdings.

While foreign markets look increasingly attractive, there is also tremendous value emerging in the U.S. market.

As of Friday’s close:

• Over 10% of S&P 500 stocks had dividend yields above 5%.
• Over 20% had yields above 4%.
• More than 20% of S&P 500 companies announced share buybacks that would retire over 10% of their outstanding shares — providing strong support for share prices.

Dividend and buyback yields at these levels haven’t been seen since the COVID panic of 2020 or the bottom of the 2007–2009 Financial Crisis.

In short, while we are increasing our exposure to foreign markets, we are also excited about deep value opportunities at home. We believe this balanced approach positions us well to navigate the challenging but opportunity-rich environment ahead. In times like these, staying flexible is critical. We are actively monitoring policy developments and adjusting portfolios to capture opportunities — both abroad and here at home — while maintaining a cautious, risk-managed approach. If you have any questions regarding your portfolio or our investment strategy, please do not hesitate to reach out to your wealth manager.

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