Apr 11, 2025
Dollar Diversification: Why Now?
3 lessons from the tariff tantrum
Key takeaways:
- The tariff-driven fluctuations in U.S. stocks, bonds, and the dollar indicate waning global confidence in U.S. assets.
- Despite some relief, U.S. tariffs remain at post-war highs, already prompting consumers and businesses to alter their behaviour amid persistent policy uncertainty.
- The volatility underscores the importance of global diversification. Investors should consider broadening their portfolios internationally and exploring currency diversification, particularly as many hold significant U.S. overweights.
- While it may feel tempting to hit sell, staying committed to your investment strategy is often the best approach. History shows that market timing can meaningfully impact long-term returns.
Markets threw a full-blown tantrum over the latest tariff turmoil. The abrupt pause in (some) U.S. tariffs triggered historic moves—both euphoric and unsettling—across U.S. stocks, bonds, and the dollar, leaving investors scrambling for answers.
The real shock was the magnitude of the moves. Global stocks teetered on the edge of bear market territory before rebounding, with the S&P 500 swinging 6% or more in both directions for three straight days. U.S. Treasuries saw their steepest weekly decline in over 20 years, with 10-year yields rising about 50 basis points, while the U.S. dollar had its fourth-largest weekly drop since the Global Financial Crisis. Amidst the chaos, gold regained its footing, reaching new record highs.
For investors, the synchronized moves, especially the declines, were a wake-up call. Despite the scale back in current tariffs, trust has been shaken, and questions remain about the end state. Currently, there's a ‘pause’ on almost all country-specific tariffs, and certain electronics levies are temporarily exempt, but the 10% universal tariff remains. Meanwhile, China faces U.S. tariffs at a staggering 145% rate after a week of tit-for-tat retaliation.
With U.S. policy uncertainty at a fever pitch, market anxiety has been concentrated in U.S. assets, prompting a reevaluation of investment strategies. Here are the three signals we learned from last week’s tariff tantrum.
1. The chaos suggests a questioning of confidence
Despite President Trump's ‘pause’ on some planned tariffs, uncertainty looms large: What's the White House's ultimate goal? Can tariff revenue truly bridge the $6 trillion deficit? Will uncertainty stifle U.S. investment? Can consumers absorb the shock? Is AI investment still viable with rising tech costs?
In the meantime, duties remain at their highest in the post-war period.
Despite some relief, the U.S. tariff rate stands at its highest in the post-war period
Average tariff rate on all U.S. imports, %
Sources: J.P. Morgan Asset & Wealth Management: Michael Cembalest – ‘Eye on the Market: Trump Tracker,’ Tax Foundation, J.P. Morgan Global Economics, Goldman Sachs Global Investment Research. Analysis as of April 12, 2025. MoW = Most of World. Note: assumes no elasticity of imports due to higher tariff rates.
Since ‘Liberation Day,’ those mounting concerns have hit U.S. stocks, bonds, and the dollar hard—a rare trifecta. Volatility, especially in fixed income and currency markets, seems to have prompted the administration’s policy U-turn. Yet, further shakeups can't be ruled out as the White House heads to the negotiating table. President Trump said he plans to announce a tariff on ‘semiconductors and the whole electronics supply chain’ in the next week, while investigations continue for pharmaceuticals, lumber, and copper. Meanwhile, legal challenges and voices from business and policy leaders are growing louder.
Post-'Liberation Day,' U.S. assets have declined in unison
Market reaction since ‘Liberation Day’ tariff announcement (2nd of April 2025)
Source: Bloomberg Finance L.P. Data as of April 14, 2025. U.S. dollar represented by the DXY Index. S&P 500 Index reaction is price return.
To that end, multinational corporations and CEOs are in flux. Before last week’s levies hit, Apple rushed 1.5 million iPhones from India and China before tariffs hit, while Amazon canceled orders from Asia. As the Q1 earnings season kicks off, more companies are pulling their guidance, citing forecasting challenges. Delta Airlines led the way by withdrawing its guidance entirely. The impact of this uncertainty is already evident: for 25 of the last 26 weeks, more Wall Street analysts have lowered their S&P 500 earnings forecasts than raised them, marking the longest streak since early 2023. Our rough estimates suggest the high-teens effective tariff rate in place today could seriously dent expected economic and S&P 500 earnings growth this year.
2. Global diversification looks even more essential
Shaky confidence is evident in recent flow data. While U.S. domestic investors have been buying U.S. stocks, foreign investors have been selling U.S. equities at a record pace, surpassing even the COVID crisis. It's not just stocks; 10-year U.S. Treasury yields jumped 50 basis points last week, while German Bund yields stayed flat. The two bond markets typically move in tandem, and last week marked the largest divergence on record since the fall of the Berlin Wall.
That’s stark considering the trend of U.S. exceptionalism over the last decade, where most investors didn’t need to look too far beyond U.S. orders for consistent outperformance. While a few weeks don’t confirm a new trend, the volatility suggests global investors are recognizing the importance of global diversification.
If you've built up heavy U.S. weightings in recent years, like many investors, consider broadening your investments across regions and exploring currency hedging to balance your U.S. asset and dollar exposure. Positive forces have been emerging in Europe and Japan, with opportunities to pick-up quality companies trading a discount amid the selloff. And for those whose home currency isn’t the U.S. dollar, currency considerations are becoming more impactful as the dollar faces pressure.
Diversifying doesn’t have to happen it all at once. Think of how you’d use your 'incremental pound or euro' as you look ahead. We think it’s sensible to orient those additional investments internationally, rather than adding to already large U.S. overweights.
3. Market timing is a risky game
There’s no sugar-coating the tough start to the year. The S&P 500 is still down over -10% from its January highs, even as some tariff reprieve pulled it back from the edge of a bear market. While there’s no clear historical precedent for today's environment, past selloffs can still offer valuable lessons.
Bear markets aren't one-size-fits-all; they vary in cause, magnitude, and recovery speed. Structural bear markets tend to stem from financial bubbles, cyclical ones from economic cycles, and event-driven ones from sudden shocks. So far, the current selloff looks ‘event-driven,’ sparked by 'Liberation Day' and its self-inflicted market pain. That’s not to say, however, it couldn’t transition into a cyclical bear market if growth fears mount. It seems that everyone lately—from Wall Street economists to political pundits, talk show hosts, and metro commuters—has been debating recession risks.
A history U.S. bear markets
S&P 500 Index bear markets and recoveries since 1929, categorized by bear market type
Source: Standard & Poor's, J.P. Morgan Asset Management, Goldman Sachs, FactSet. Data is as of April 11, 2025.
So what does history tell us? Both event-driven and cyclical bear markets usually see U.S. stocks fall around -30%, but event-driven ones tend to rebound faster. To that end, it’s promising that the S&P 500 recently tested and rebounded from its early 2022 highs (around the 4,800 level).
The S&P is still holding up against its 2022 highs
S&P 500 Index level
Source: Bloomberg Finance L.P. Data as of April 11, 2025.
But while stocks may face more turbulence, we don’t think exiting markets is the answer—in fact, history suggests trying to time it is risky. Days with big stock losses tend to cluster with days seeing big gains. In the last 20 years, seven of the ten best market days occurred within 15 days of the ten worst. For instance, right after ‘Liberation Day,’ the S&P 500 fell over 5% on two straight days, but surged 9.5% the following Wednesday. Missing that gain is like missing 1.5 years of equity returns based on our Long-Term Capital Market Assumptions (LTCMAs).
In times like these, perhaps the most important thing for investors to do is to revisit their plan. Understanding your goals and defining investment success are key to effective portfolio construction. For those seeking to take action amid the volatility, we see structured notes with downside protection, gold, investment grade bonds, and hedge funds as sensible ports of call.
Our team is here to navigate short-term market volatility while keeping your long-term success in focus.
INDEX DEFINITIONS
- U.S. Dollar Index (DXY): The DXY is an index of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners' currencies.
- S&P 500 Index: The Standard and Poor's 500, or simply the S&P 500, is a stock market index tracking the stock performance of 500 leading companies listed on stock exchanges in the United States.
RISK CONSIDERATIONS
All market and economic data as of April 2025 and sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.
We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.
- You may not invest directly in an index.
- Additional risk considerations exist for all strategies.
- The information provided herein is not intended as a recommendation of or an offer or solicitation to purchase or sell any investment product or service.
- Opinions expressed herein may differ from the opinions expressed by other areas of J.P. Morgan. This material should not be regarded as investment research or a J.P. Morgan investment research report.
- Structured products are a type of derivative. These products are intended for experienced and sophisticated investors who are willing to bear the high economic risks of the investment. The most common risks include, but are not limited to, risk of adverse or unanticipated market developments, issuer credit quality risk, risk of lack of uniform standard pricing, risk of adverse events involving any underlying reference obligations, risk of high volatility, risk of illiquidity/little to no secondary market, and conflicts of interest. Before investing in a structured product, investors should review the accompanying offering document, prospectus or prospectus supplement to understand the actual terms and key risks associated with each structured product. Any payments on a structured product are subject to the credit risk of the issuer and/or guarantor. Investors may lose their entire investment, i.e., incur an unlimited loss. For a more comprehensive list of the risks involved with this particular product, please refer to the Risk Disclosure Booklet and/ or speak to your J.P. Morgan Advisor. If you are in doubt about the risks involved in the product, it is recommended that you clarify this with the intermediary or seek independent professional advice.
- Investments in commodities may have greater volatility than investments in traditional securities. The value of commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and regulatory developments. Investing in commodities creates an opportunity for increased return but, at the same time, creates the possibility for greater loss.
- Holders of foreign securities can be subject to foreign exchange risk, exchange-rate risk and currency risk, as exchange rates fluctuate between an investment’s foreign currency and the investment holder’s domestic currency. Conversely, it is possible to benefit from favorable foreign exchange fluctuations.
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- Investments in alternative investment strategies are speculative, often involve a greater degree of risk than traditional investments including limited liquidity and limited transparency, among other factors and should only be considered by sophisticated investors with the financial capability to accept the loss of all or part of the assets devoted to such strategies.
Important Information
The market cast a loud “no” vote on tariffs, but opportunities emerged. Here are some key takeaways rising from the turmoil.
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