The Trump administration’s sweeping “Liberation Day” tariffs have rattled Wall Street. The S&P 500 plummeted 4.8 percent for its worst day since the pandemic crashed the market in 2020, while the Dow dropped 4 percent and Nasdaq sank 6 percent.
The effects of Trump’s trade war won’t be limited to just the financial markets: It’s expected to aggravate inflation and potentially hurt the job market, too. To make sense of the volatility, we turned to Scott Clemons, the chief investment strategist at Brown Brothers Harriman. He breaks down what this could mean for inflation, the potential for a recession — or worse, stagflation — and what he’s telling his clients about weathering the economic uncertainty.
Scott Clemons: Yes. Tariffs will certainly lead to higher prices. It’ll be interesting to see how the Federal Reserve responds to this. They don’t meet until May 9, which feels like forever from now with how quickly things are moving, but I’m curious to see if they stick to their gradual downshift in interest rates or if they back off.
Even if something were to develop that would postpone or suspend the imposition of these tariffs, there’s still so much uncertainty and anxiety surrounding this that it’ll still impact employment. We’ve already seen that in business confidence numbers in March.
Absolutely. Not for the first quarter, but in the second quarter, certainly if these tariffs become a reality. The uncertainty alone will slow the economy down. Roughly, I think it shaves 2.5 to 3 percent off of GDP growth, and the economy’s growing at a rate of 2.5 percent. So do the math, that puts you into negative territory.
I worry about that as well. If these tariffs go into effect for an extended period, then you get higher prices at the same time you have constrained economic activity. That’s the definition of stagflation. That gives the Fed a really tough job. If they raise rates to combat inflation, it could push the economy lower, but if they lower them to save the economy, it could trigger more inflation. The central bank hasn’t had to deal with that in almost 50 years, and of course, this time around it’s a self-imposed problem.
The broad tariffs are supposed to be effective on April 5 and the reciprocal ones on April 9. So there’s still a few days for the White House to either back off of this or for Congress to intervene. My expectation is there’s going to be pressure from within, kind of like what you saw in the Senate yesterday, when those four Republican Senators crossed the aisle to [vote to] lift the tariffs on Canada.
I think a legal case could also be made that the economic policy Trump is invoking to put these tariffs in place is illegal. So I think we’re still in the second or third inning of this, and a lot is going to play out over the next couple days or weeks.
What we’re telling our clients is not to panic and not to do anything in the near term, because no one knows what’s going to happen next — not even, I think, the man sitting at the resolute desk. We’re talking to clients all day, who are saying, “The market’s down, 1,400 points, surely we should do something.” And the answer is, I think the best thing to do is just buckle up. If you look at the angst and volatility of the pandemic or the global financial crisis or even going back to September 11, these were all unique events but in every case, the investors who stuck with their long-term patient investment approach were able to weather it.
A lot of companies will soon be reporting their earnings. So we’ll hear whether companies are holding excess cash, delaying investment plans, or delaying hiring. That will give us a good sense of the future path of the economy and whether we’re headed for a recession.
This interview has been edited and condensed for clarity.
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