By Randy Myers
The U.S. risks slowing economic growth and continued financial market volatility as it continues to experiment with higher levels of tariffs on imported goods. For investors, maintaining a diversified investment portfolio will be important to riding out the storm.
Those were the key takeaways from a presentation in mid-April by economist Marta Norton, chief investment strategist for Empower Investments, at the 2025 Stable Value Investment Association Spring Seminar in New Orleans. While not ruling out the possibility of a tariff-induced recession, Norton pointed to several mitigating factors—including the possibility of the Federal Reserve cutting short-term interest rates—that could help to moderate any downturn in economic growth.
Norton characterized the tariffs imposed by President Donald Trump since taking office in January as “staggeringly high”—as much as 145% on most imports from China—and a “sea change” from past practice. The U.S. had had an effective tariff rate of about 2.5% since the start of the 21st century and, as of April 9, it stood at 2.9%.
While some observers contend that Trump’s tariffs are just a short-term negotiating ploy to extract concessions from trading partners, Norton cautioned that the president has been an advocate for tariffs for many years and views them as a means to achieving long-term objectives such as reinvigorating U.S. manufacturing.
Still, Norton anticipates some relaxation of the new rates over time.
“We’re not going back to 2.5% tariffs,” she said. But, she added, “the kind of bounds I’m creating for tariffs in my mind, even with the Trump administration, is somewhere between 10% and 15%.”
Norton noted that the U.S. economy was performing well heading into 2025, buttressed by strong corporate earnings growth, a low unemployment rate relative to the long-term historical average, and resilient consumer spending, even if many Americans didn’t appreciate how healthy it was.
With that strong economy—U.S. gross domestic product grew by 2.5% in 2023 and 2.8% in 2024—came big gains in the stock market. The Standard & Poor’s 500 stock index, for example, delivered total returns in excess of 20% for both of those years.
“Whatever angle you’re looking at the economy, from a hard data perspective it’s actually been in a pretty good space—and has remained in a pretty good space,” Norton said.
Consumers weren’t quite as sanguine, in part due to the lingering impact of inflationary pressures that boiled over as a result of the COVID-19 pandemic, which disrupted global supply chains.
Nonetheless, it wasn’t until Trump announced tariffs on Canada and Mexico in the first quarter of 2025 that consumer sentiment and confidence indices both plummeted.
The stock market made a U-turn, too. From its all-time high on February 19, the S&P 500 fell 12.2% on a price basis by the close of trading on April 15. It would tumble again the next day, putting it down 14.2% from its February high. The tech sector, which had been leading the market heading into the new year, was particularly hard hit.
Norton explained that tariffs will likely weigh on corporate profit margins if they aren’t pared back. Tariffs imposed by the U.S. can increase costs for businesses that import foreign goods, while retaliatory tariffs imposed by other countries can negatively impact business revenues to the extent those tariffs price U.S. products out of reach for foreign customers. The tech sector is one of the few corners of the market where corporate profits may nonetheless remain strong due to high customer demand, although Norton said Empower’s research shows a lot of cost and revenue vulnerability in that sector, too.
Norton noted that the U.S fixed-income market has been holding up better than the equity market in the wake of the tariff wars, with the Bloomberg U.S. Aggregate Bond Index showing a moderately positive year-to-date total return. However, high-yield bonds, which tend to trade in sympathy with stocks, were showing losses.
While the recent equity market declines have made stocks less expensive than they were heading into the new year, Norton said she expects continued market volatility in the near term. And she said, all the negative economic and financial market developments in play could further depress consumer sentiment, particularly among higher-income consumers who could pull back on spending if declining asset values make them feel less wealthy.
“Does that mean that we’re headed for a recession?” Norton asked. “Not necessarily, but it does mean we could be looking at a slower growth environment.”
The economy could get help from the Federal Reserve, she added, if it decides that it can afford to lower its target for short-term interest rates without risking higher inflation. In mid-April, she said, the financial markets were pricing in an expectation of four Fed rate cuts over the remainder of the year.
Norton warned that despite the bond market’s recent gains it ultimately may not deliver the same outstanding returns it generated in the wake of some earlier crises, like the Great Financial Crisis of 2008 or the bursting of the dot-com bubble burst in 2000. Nonetheless, Norton said most investors will want to include bonds in their portfolios right now as a hedge against further declines in the equity markets. And, she said, they should embrace diversification within their bond portfolios, too.
“Diversification is back,” she said. “We see that from the responses of different sectors in the equity market, where some sectors have held up better than others. We see it from a global equity perspective where we’re getting (better) returns (from) markets outside of the US, and we also see it from a fixed income perspective. Within fixed income, a diversified approach is really valuable when we think about how some of these variables could weigh on different parts of the fixed income market and prevent it from responding the way it has historically.”
In response to questions from the audience, Norton said that even though the dollar has been weakening lately she doesn’t anticipate that it will fall precipitously, in part because a rush by other countries to sell U.S. debt could hurt them financially, too. She also said deregulation measures taken by the Trump administration could be a positive for the economy, in part by making it easier for banks to put capital to work.
