Special Market Update: Tariffs, Market Reaction, & Positioning

On Wednesday, April 9th, the President announced an expansive set of new tariffs that exceeded consensus expectations. As markets began to digest the implications of the tariffs and assess the developing risk of retaliatory action by major trading partners like China, key sentiment indicators reached levels of fear and bearishness rivaled by the likes of the Covid-19 outset and the Great Financial Crisis.^1,2 Since the announcement, volatility has persisted. The pausing of the majority of these tariffs triggered a historic rally on April 9th, followed by a pullback to end the week.³

What has happened, how have markets responded, and how are we positioned?

• Consensus estimates leading into the tariff announcement last Wednesday were 15-20%, and at the time of the initial announcement, the effective tariff rate was closer to the mid-20% range.⁴

• The tariffs unveiled included 10% tariffs on all imports and higher declared reciprocal rates on dozens of other nations. ⁵

• Notably, this reciprocal tariff list included:

  • A 20% tariff on the European Union

  • Tariffs on a host of Southeast Asian countries: over 45% on Vietnam, Laos, and Cambodia, and 20% on Japan

  • And as of Sunday, April 13th, a 145% tariff rate on China that includes 125% reciprocal tariffs and 20% fentanyl tariffs ⁶

• This average effective tariff rate was the highest since 1909.⁷

• On the afternoon of Wednesday, April 9, the President announced that he was pausing these reciprocal tariffs for 90 days, returning to the 10% universal baseline for all countries except for China.⁸

• On Friday, April 11th, the White House published exemptions to the reciprocal tariffs for smartphones, computers, memory chips, and other electronics. The President stated that these were not exempt from the 20% fentanyl tariffs on China.⁹

• Markets have since experienced significant volatility. The Thursday and Friday following the announcement brought the biggest two-day drop in value ever, only to be followed the week after with one of the largest one-day rises in history.¹⁰

• Swings in the market have been influenced by: 

  • Changes in the expected magnitude of tariffs

  • Concerns over the near-term disruptive effects of implementing tariffs

  • Updates on the status of negotiations with certain countries from the president and his administration

  • Retaliatory announcements from other countries on the list

  • A recent 90-day pause on all but the 10% baseline tariff and China tariffs.

• Generally, there was little differentiation in the drawdowns between styles and market caps.

• We believe that our process of intentionally seeking out high-quality companies that are genuinely creating good products with good practices and are led by great management teams positions us well for times like these. 

• There are a number of opportunities that have us well-positioned to both protect on the downside and realize potential upside opportunities when the dust settles.

  • US Overweight 

    • All of our diversified equity strategies have greater domestic revenue exposure than the S&P 500, which we believe insulates us well in this situation, considering the significant ex-US and China revenue exposure across sectors.¹¹

• Midcap Opportunity

  • Mega-cap tech weakness is driving underperformance of large-cap indices (and managers)

  • Recession/beta concerns are driving small-cap underperformance

  • Index Current Year P/E vs. 25 Year Average¹²

    • S&P 500: .4% Above

    • Russell Mid Cap: 20% Below

    • Russell 2000: 33% Below 

  • Historically, mid-caps have outperformed following market drawdowns, especially during instances when valuations have been cheap relative to history (e.g., Dotcom 2000-2003).¹³

• Sector Positioning

  • We believe we are well-positioned in both the highly-impacted sectors we do not have exposure to (e.g., autos, apparel, auto suppliers), as well as by the potential beneficiary sectors we do have exposure to (e.g., industrials, utilities, natural gas infrastructure, software, insurance).

• Active Management

  • Earnings season will be an important test to see how companies respond. Our team is diligently watching and ready to respond by staying humble, close to our companies, and open and willing to adapt as conditions evolve and earnings are reported.

At Eventide, our mission includes an especially high calling to honor God and serve our clients in the way we invest. For this reason, we take the stewardship of our clients’ assets very seriously. There have been sleepless nights for many on our team as we work diligently to help ensure that our portfolios are positioned to care for our clients’ capital.

We understand these times are trying as investors, but as fundamental, active managers, these are the times we are particularly excited and honored to live out our calling. Thank you to those of you who continue to walk alongside us in pursuing Investing that Makes the World Rejoice®.

This communication is provided for informational purposes only and expresses the views of Eventide Asset Management, LLC (“Eventide”), an investment adviser, and Dolores Bamford, Eventide's Co-CIO, and is not intended for further distribution. This does not constitute investment advice nor is it a recommendation or offer to purchase or sell or a solicitation to deal in any security or financial product. There is no guarantee that any investment will achieve its objectives, generate positive returns, or avoid losses. Eventide does not provide tax, accounting, or legal advice.  As we evaluate individual companies, we start with a qualitative analysis. We seek to invest in companies that we deem to be “high-quality” by embodying four key traits: great management teams, strong industry positioning with sustainable competitive advantages, financial strength and business model resilience, and creating compelling value. Eventide's values-based approach to investing may not produce desired results and could result in underperformance compared with other investments. There is no guarantee that any investment strategy will achieve its objectives, generate profits, or avoid losses.

This situation is evolving, and circumstances may materially change in the future. There is no guarantee that such views are correct or that the outlook opinions will come to pass. Reliance upon the views expressed herein is at the sole discretion of the reader.