Weekly Investment Update (03/28/2025)

In the near term, markets are likely to remain sensitive to trade-related headlines. This week, additional auto tariffs were announced, and investors are now bracing for further details on President Trump’s trade agenda, expected on April 2. While we won’t speculate on the outcome, we believe greater clarity is a necessary step toward reducing market volatility.

We expect economic growth to continue slowing — partly as a natural deceleration following a period of above-trend performance, and partly due to an increase in the effective tariff rate. In this environment, it’s critical that inflation remain contained; however, tariffs introduce complexity to the near-term outlook. For instance, while auto tariffs could drive up used car prices, falling shelter costs may help offset that pressure. It’s a delicate balance that warrants close monitoring.

In its most recent meeting, the Federal Reserve emphasized the importance of long-term inflation expectations, which remain well-anchored for now.

A key underpinning of current market psychology is the belief that the Fed retains flexibility to cut rates if growth weakens significantly. A sustained rise in long-term inflation expectations could erode that confidence. We believe the Fed will preserve its capacity to lower rates if needed, and we will continue to watch market-based inflation expectations closely.

Uncertainty is Driving Weaker Sentiment, but Consumer Fundamentals Remain Solid

What is happening: Uncertainty has weighed significantly on consumer sentiment, with some measures of consumer confidence reaching 12-year lows. Many consumers have cited policy uncertainty as a key influence on their expectations for the economy. However, despite the slump in sentiment, economic data continue to show resilience. The control group of retail sales, which excludes volatile categories and feeds into the calculation of GDP, came in firmly above expectations. Additionally, the main drivers of consumption remain intact, with steady job creation and wage growth continuing to outpace inflation.

Why it matters: Prolonged periods of uncertainty can lead to pullbacks in economic activity. Economic growth is expected to slow this year, with trade and overall policy uncertainty posing downside risks to consumer demand. That said, the labor market remains sound, providing a catalyst for consumer resilience. Even as the pace of economic activity is projected to slow from 2024 levels, consumption is still expected to support economic growth. While the low-income consumer has faced continued headwinds, the high end has been resilient. The two highest income quintiles account for about 61% of total consumption, highlighting their critical role in driving economic growth.

Amid heightened policy uncertainty and weakening sentiment, U.S. equities remain under pressure. The consumer discretionary sector has significantly underperformed, becoming the worst-performing sector in the S&P 500 year-to-date, while consumer staples have shown more resilience. When economic growth concerns weigh on the market, staples tend to outperform discretionary sectors given their defensive nature. Bessemer portfolios are underweight the consumer discretionary sector and neutral weight the consumer staples sector.

Bessemer has adjusted portfolios to reflect shifting consumer dynamics, recently trimming positions to companies that are more vulnerable to pullbacks in discretionary spending trends, such as Hilton. Meanwhile, we continue to find companies benefiting from consumer trade-downs. BJ’s Wholesale Club, a membership-based retail store, continues to grow its customer base due to its strong value proposition. For more detail on our views of current consumer dynamics, please see our recent Investment Insights “Consumer Update in Five Pictures.”

President Trump Announces Auto Tariffs Ahead of Expected Reciprocal Tariffs

What is happening: Trump announced plans to impose a 25% tariff on automobile imports, including passenger vehicles, light trucks, and a wide range of key auto parts, such as engines, transmissions, and electrical components. This move is expected to raise the overall effective U.S. tariff rate to between 9% and 12%, the highest level since the 1940s. While some exceptions and delays may apply (for example, for autos and parts under USMCA), the administration expects most of these tariffs to take effect and remain in place for the foreseeable future. The tariffs could affect over $300 billion in annual imports, including more than $200 billion in finished vehicles and $100 billion in parts. Trump has described the policy as “permanent,” and he estimates the tariffs will generate $100 billion in new annual revenue (an estimate that may not be fully realized).

Separately, Trump announced that reciprocal tariffs are still scheduled for April 2. Though light on details, he characterized them as “very lenient.” Reports indicate that U.S. trading partners will receive a reciprocal tariff rate, and while these new duties could take effect immediately, they may be open to negotiation in the weeks following their implementation. Lastly, the president also indicated that additional sector-specific tariffs are being considered that may include measures targeting pharmaceuticals, semiconductors, copper, and lumber.

Why it matters: This announcement confirms the administration’s intent to pursue sectoral tariffs as part of a broader shift in trade policy. The auto tariffs are likely to be highly disruptive for the auto industry, functioning both as a protectionist measure for the North American supply chain and as a potential lever to shift vehicle assembly back to the U.S. from Canada and Mexico.

In the short term, the tariffs could be inflationary if domestic producers raise prices on new cars. While Trump has indicated he would look unfavorably on automakers that raise prices in response to tariffs, higher prices could lead consumers to hold onto used vehicles longer, driving up both used car prices and demand for auto repairs. In the long run, these tariffs could boost domestic investment and production if automakers come to view the tariffs as permanent and shift final assembly to the U.S. The tariffs will also have global ramifications, particularly for export-heavy economies such as Japan and Korea, where auto exports to the U.S. represent around 7% of total exports. While Trump has framed the tariffs as permanent, he has also indicated potential reversals if other countries offer concessions.

Markets are now focused on the upcoming April 2 reciprocal tariff announcement. Outcomes could range from better-than-expected (10%–15% tariffs with room for negotiation) to worse-than-feared (tariffs above 20% with limited flexibility), particularly if they prompt retaliation from key trading partners. The inclusion of value-added taxes (VAT) could further increase the effective burden, especially for European countries. Looking beyond April 2, trade policy uncertainty is likely to persist as negotiations continue and sector-specific tariffs remain on the table. Bessemer portfolio teams are continually evaluating tariff developments and adjusting portfolios accordingly. For example, Bessemer equity portfolios are maintaining minimal auto sector exposure of only 30 basis points versus a 2% benchmark weight.