While the first three months of 2025 saw mild stock market declines, things really started falling off the rails on April 2nd, otherwise known as ‘Liberation Day’. During a formal rose garden ceremony, President Trump held up a large board announcing reciprocal tariffs on approximately 60 countries and a universal tariff of 10 percent. These countries had been “ripping off” the US for years, Trump insisted, although economists would argue that his calculations were a tad embellished and tariffs over-reaching, as even an island inhabited only by penguins would be tariffed. Indeed, no one is safe in a trade war.
That afternoon the S&P 500 fell, and would continue to fall 12 percent over the next five trading days.
Many investors sold, and not just fancy hedge fund managers. Everyday people close to retirement sold stocks in their RRSPs and 401Ks. Friends texted in a panic.
“Should I sell everything and hide it in a GIC? Things are only going to get worse!” they cried.
I urged as many as I could to stay the course, reminding them that downturns eventually do pass. I shared JL Collins’ Guided Meditation For When the Stock Market is Dropping. But even I had a sinking feeling that perhaps this time, things were different. Would the integrated world markets survive free trade’s unraveling in the name of American protectionism? Wouldn’t tariffs lead to unprecedented inflation for everyone, you and me included? What would that mean for our portfolios of US, international and Canadian stocks?
Then the morning of April 9th the tariffs kicked in. The markets wobbled as investors braced for further drops. But something strange was happening behind the scenes. Overnight and into the day, foreign investors were selling off 10-year US Treasury Bonds. As a result, the yield on the US 10-year bond had spiked. Basically, bond yields affect the cost of borrowing in the US, from mortgages to bank loans. The higher the interest rate, the more it costs countries, businesses and people to borrow money. This rapid rise in interest rates was potentially putting the global financial systems at risk (source). We may never know how close we came to a global financial meltdown because Trump conveniently made a last-minute announcement, pausing reciprocal tariffs for 90 days.
The S&P 500 began to climb…and climb…and climb, until it closed 9.52 percent higher, its best day since 2008. The Nasdaq had its best day ever, closing 12 percent higher.
By May, the S&P 500 had fully recovered the 12 percent drop from April 2nd’s Liberation Day and would go on to chart new highs. At the time of this writing in August 2025, the S&P 500 is at 6,382, up 8.76 percent year-to-date and up over 28 percent from April’s lows. European and Canadian stocks have fared even better, with the FTSE 100 up 10 percent year-to-date, and the Canadian TSX up 12 percent. Canadian investors who held onto Vanguard’s All-Equity ETF Portfolio (VEQT) which provides a mix of US, International and Canadian stocks should be enjoying 9.41 percent returns plus a nice end-of-year dividend payout.
So what happened? Why didn’t Trump’s tariffs break the world economy and crash the stock market like we all thought they would? Well a few things happened:
TACO trade
By May, investors were used to Trump’s waffling ways. He would make a dramatic announcement on Truth Social, only to walk it back before the deadline, as he did with the tariffs on April 9th. For example, he would announce that he was going to fire Fed Chairman Jerome Powell, which investors feared would compromise the Federal Reserve’s autonomy. Then when asked by reporters the next day, Trump would insist that he had no intention whatsoever to fire Powell. Investors grew wise to this erratic behaviour and began to stay the course and ignore the noise. In fact, many began to see these temporary dips as a trading opportunity to buy more stocks. They even gave it a fun name, the TACO trade: Trump Always Chickens Out.
Upper-income earners and the wealth effect
We learned earlier that a company’s earnings are ultimately what power the company’s share price. Back in April, investors worried that tariffs would either 1. force companies to raise their prices – which could cause inflation, or 2. force companies to pay the difference – which could eat into their margins and result in poor earnings. However, by July/August not only have many companies managed to keep pricing consistent, but many have knocked their earnings reports out of the park, showing that, so far, their businesses are resilient to tariff threats.
Perhaps most importantly, upper-income earners – who account for a majority of US discretionary spending – are more confident and plan to spend even more than they were before April’s tariff announcement, according to a new report by consulting firm Bain & Company. These consumers are still employed and are enjoying their lives by booking cruises and buying televisions. Interestingly, these upper-income earners tend to hold equities, so the more they spend, the more companies continue to report strong earnings, which gives investors the confidence needed to buy more shares. This in turn makes these upper-income earners feel even wealthier every time they look at their portfolios from their living rooms while enjoying a glass of rosé. This ‘wealth effect’ then causes these upper-income earners to spend even more, thus continuing to drive earnings and investor sentiment (source). It’s a beautiful cycle, really.
Strong earnings buoyed by a happy upper-income consumer are giving investors confidence to continue buying shares in solid companies, even as tariffs continue to dominate the news cycle. Source: Stobie, Brian. “US Consumer Health Update.” Bain & Company, July, 2025.
Trade agreements/certainty
If there’s one thing the market hates it’s uncertainty. Back in April after Trump announced his global tariffs and sent his team out to make trade agreements around the world, no one knew how this was going to end. But since then, many countries have made deals with the US, and while some deals may be more beneficial to the US than the foreign countries themselves, investors can at least take that information and start to trade accordingly. We may not like this new world order, but at least, for investors like us, there is more certainty.
Looking ahead to the rest of 2025
So are we out of the woods for the rest of the year? Will the lows of Liberation Day return once more with vengeance? As always, no one has a crystal ball. The stock market could crash tomorrow or it could continue to march higher. The same report that showed a rosy outlook for upper-income earners does warn that lower and middle-income earners are feeling the pinch as a result of stagnating housing markets and job losses, so nothing is guaranteed (source).
Even if the market does march higher, 2 percent drops, 5 to 10 percent corrections and 20-30 percent crashes are all to be expected when investing long-term. I am comfortable with this process and plan to stay invested, knowing that any dividends I receive will be automatically re-invested for the future. This is a process that has worked for me based on my risk tolerance and investing time horizon.
As always, if you’re new to investing you’ll want to know your risk tolerance, position your portfolio accordingly, and stay the course!
Disclaimer: I am not a financial advisor. None of this is financial advice. I encourage you to do your own research.
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