What have tariffs really done to the US economy?

US tariffs initially roiled markets, with the S&P 500 dropping 12% in April, but a subsequent scaling back of aggressive plans led to a market rebound, with the S&P 500 now up 6% YTD. Despite the overall market recovery, tariff-vulnerable sectors like retail and auto remain pressured, and broader economic data indicates a significant slowdown in consumer spending, with retail sales declining for two consecutive months and overall growth at its slowest since 2020. While the inflation impact remains unclear and the job market is currently resilient, businesses are in a 'wait-and-see' mode amid policy instability, suggesting an economic softening is likely, with recession risk if higher tariffs are reimposed.

Analysis

The US equity market has demonstrated significant sensitivity to trade policy shifts, initially dropping 12% on the S&P 500 within a week following aggressive tariff announcements in April, before rebounding to a 6% year-to-date gain after the administration moderated its stance to a 10% rate. This market recovery, however, appears disconnected from weakening underlying economic data, suggesting potential investor complacency ahead of a critical July 9th deadline for trade talks. Key leading indicators are flashing warning signs, with retail sales declining for a second consecutive month (down 0.9% in May) and Q1 consumer spending growth marking its slowest pace since 2020. While the direct impact on inflation remains muted for now, with headline CPI up only 0.1% in May, economists widely expect costs will eventually be passed to consumers. The primary support for the economy remains a resilient labor market, with unemployment at 4.2%, but businesses are reportedly in a self-imposed 'time-out' on hiring and investment due to policy uncertainty. This has led to an economic 'stall mode,' where a future softening appears likely, and a recession remains a distinct possibility should higher tariffs be reimposed.

Key Decisions for Investors

• Given the disconnect between the market rebound and weakening consumer data, investors should be cautious of complacency and prepare for potential volatility as the July 9th trade deadline approaches.
• It is prudent to review and potentially reduce exposure to tariff-vulnerable sectors, specifically retailers and auto companies, which have underperformed the broader market and face continued risk from policy uncertainty.
• Monitor upcoming retail sales, consumer spending, and employment data closely, as further deterioration in these figures would signal a higher probability of an economic slide beyond a mere softening.
• Consider maintaining a defensive posture or employing hedging strategies to mitigate downside risk until there is greater clarity on the administration's long-term tariff strategy.