Trump's unknowable tariffs leave investors hanging

With his new tariff announcement on Wednesday afternoon, President Trump has cemented his reputation for being unpredictable. Why it matters: The markets like 10% tariffs more than they like the broad-brush application of a potentially erroneously calculated formula. But investors are still far from happy. The big picture: The White House and its friends think of this as the art of the deal. (Treasury Secretary Scott Bessent said Wednesday it was Trump's intention all along.) America's trading partners, and U.S. companies that crave predictability aren't likely to see much art in it. Where it stands: The S&P 500 closed at 5,455 on Wednesday, which is 3.8% below where it closed on April 2, before Trump's "Liberation Day" tariffs were announced. The yield on the 10-year Treasury bond closed at 4.34%, similarly representing a flight away from U.S. assets in comparison to the April 2 closing level of 4.20%. By the numbers: The new tariff regime represents a rise of about 15 percentage points overall, Goldman Sachs economists estimated on Wednesday — which means they still think there's a 45% probability of a recession this year. The Yale Budget Lab's Ernie Tedeschi, on the other hand, thinks the hike in China tariffs to 125% means the overall effective rate has still risen by about 25 percentage points, which is clearly recessionary. President Trump did say on Wednesday however that "a deal's going to be made with China," so it might be reasonable to expect the 125% tariff rate to not last long. How it works: Recessions are broadly based on trends in gross domestic product (GDP). Imports by definition are not produced domestically and are therefore the one term in the GDP equation that's negative. Which is to say, all other things being equal, lower imports can mean higher GDP.That said, if tariffs are high enough, tariffs can be recessionary. Facing 10% across-the-board tariffs on everything they import, domestic corporations are likely to pull back on investment decisions, given greater uncertainty and higher input costs.Between the lines: Many economists are still projecting economic growth this year, and any tariff-driven recession would probably be mild. "We are coming from strength," explains Loomis Sayles portfolio manager Pramila Agrawal.The last mild recession in the U.S. was in 2001, when employment and corporate investment both fell in the wake of the dot-com bust. There weren't crisis-level financial dislocations like we saw in 2008-09 or in 2020.The intrigue: We've never lived in a world of anything remotely close to 125% tariffs on one of our largest trading partners, which means the effects of such things are incredibly hard to model."Can you really make a distinction between a 50% tariff and 100% tariff?" asks Tom Porcelli, chief U.S. economist at PGIM Fixed Income.Even at 54%, the tariffs on China were big enough "to thrust people to the sidelines and to delay corporate investment decisions, whether that's investment in capital expenditures or investment in hiring," he says.The further move to 125% might have some effects on trade and inflation, but in terms of economic activity the marginal difference could be pretty small.Another unknown: The degree to which Chinese exports would end up entering the U.S. via other countries with lower tariffs.The bottom line: We're deep into uncharted waters, and standard economic modeling kits were not made for a world of 125% tariffs — or, for that matter, of global tariffs that remain in place for a mere 13 hours before being lifted. That makes all economic predictions even less useful than they normally are.

With his new tariff announcement on Wednesday afternoon, President Trump has cemented his reputation for being unpredictable. Why it matters: The markets like 10% tariffs more than they like the broad-brush application of a potentially erroneously calculated formula. But investors are still far from happy.

The big picture: The White House and its friends think of this as the art of the deal. (Treasury Secretary Scott Bessent said Wednesday it was Trump's intention all along.) America's trading partners, and U.

S. companies that crave predictability aren't likely to see much art in it. Where it stands: The S&P 500 closed at 5,455 on Wednesday, which is 3.

8% below where it closed on April 2, before Trump's "Liberation Day" tariffs were announced. The yield on the 10-year Treasury bond closed at 4.34%, similarly representing a flight away from U.

S. assets in comparison to the April 2 closing level of 4.20%.

By the numbers: The new tariff regime represents a rise of about 15 percentage points overall, Goldman Sachs economists estimated on Wednesday — which means they still think there's a 45% probability of a recession this year. The Yale Budget Lab's Ernie Tedeschi, on the other hand, thinks the hike in China tariffs to 125% means the overall effective rate has still risen by about 25 percentage points, which is clearly recessionary. President Trump did say on Wednesday however that "a deal's going to be made with China," so it might be reasonable to expect the 125% tariff rate to not last long.

How it works: Recessions are broadly based on trends in gross domestic product (GDP). Imports by definition are not produced domestically and are therefore the one term in the GDP equation that's negative. Which is to say, all other things being equal, lower imports can mean higher GDP.

That said, if tariffs are high enough, tariffs can be recessionary. Facing 10% across-the-board tariffs on everything they import, domestic corporations are likely to pull back on investment decisions, given greater uncertainty and higher input costs.Between the lines: Many economists are still projecting economic growth this year, and any tariff-driven recession would probably be mild.

"We are coming from strength," explains Loomis Sayles portfolio manager Pramila Agrawal.The last mild recession in the U.S.

was in 2001, when employment and corporate investment both fell in the wake of the dot-com bust. There weren't crisis-level financial dislocations like we saw in 2008-09 or in 2020.The intrigue: We've never lived in a world of anything remotely close to 125% tariffs on one of our largest trading partners, which means the effects of such things are incredibly hard to model.

"Can you really make a distinction between a 50% tariff and 100% tariff?" asks Tom Porcelli, chief U.S. economist at PGIM Fixed Income.

Even at 54%, the tariffs on China were big enough "to thrust people to the sidelines and to delay corporate investment decisions, whether that's investment in capital expenditures or investment in hiring," he says.The further move to 125% might have some effects on trade and inflation, but in terms of economic activity the marginal difference could be pretty small.Another unknown: The degree to which Chinese exports would end up entering the U.

S. via other countries with lower tariffs.The bottom line: We're deep into uncharted waters, and standard economic modeling kits were not made for a world of 125% tariffs — or, for that matter, of global tariffs that remain in place for a mere 13 hours before being lifted.

That makes all economic predictions even less useful than they normally are..