A Note On Tariffs
.webp)
The Trump Administration announced a new series of tariffs: a 10% base rate on all countries, plus “reciprocal tariffs” scaled to the size of each country’s trade deficit with the U.S. (the larger the deficit, the higher the tariff). Markets felt the impact, with major equity indexes declining and long-term interest rates falling, suggesting heightened recession fears.
The tariffs on key trading partners, which exceeded market expectations, hit technology and import-sensitive sectors like consumer discretionary especially hard.
So far, the market’s reaction falls within the range of a typical volatile period-declines of this magnitude occur in many, if not most, years.
The key question is whether this will trigger a trade war or will it trigger negotiations and more reasonable tariff levels? If it leads to a cycle of retaliation, counter-retaliation, etc., then most likely it would lead to a recession and possible further market declines. If it leads to negotiations and a softening of the tariff stance, then the result would probably be more muted. It’s too early to tell how this will play out. However, the level of risk is elevated.
The Trump Administration’s policies have both negative and positive economic implications. The negatives - tariffs and policy uncertainty - are hitting first, while the positives, like lower taxes and reduced regulations, will take time to materialize.
Our best guess? The next 3-6 months will be volatile or negative as uncertainty persists. Over time, policy direction should clarify, and the benefits of tax and regulatory changes may emerge within 6-18 months. Still, much depends on other countries’ responses, and many factors warrant close attention. While we expect a mild recession followed by a return to growth, we could easily see a severe recession developing if negotiations with key trading partners fail and we get into a cycle of retaliation.
Aside from the policy concerns, we have believed for some time that Big Tech was overvalued and this has led to the S&P 500 being expensive given the large weight of Big Tech in the index. To some degree, the reaction to the tariffs is a catalyst to prick the valuation of expensive stocks. While this process is painful in the near-term, ultimately it is more sustainable for the market to have stocks trading at a more reasonable valuation and positive for potential future returns. We are finding the valuations for many other stocks to be reasonable or even attractive at current prices.
Despite our outlook, we would not recommend trying to time the market as the market reacts quickly to changes in the news and expectations and by the time you make changes, it’s usually too late. In our opinion, the most important thing investors should do is make sure your asset allocation is consistent with your needs, liquidity, time horizon, and risk tolerance. While cognizant of the near-term risk, we are positive about the long-term outlook for good businesses, especially those that are not heavily dependent on trade. However, if you need income or capital for the next few years, it is important to maintain an appropriate asset allocation in relatively lower risk, liquid assets.
More By This Author:
How Long Can You Defer Taxes?
Is Your Business Ready to Run Without You?
Sound Decisions Vs. Monday Morning Quarterbacking
If you would like to schedule a meeting to review your asset allocation, financial plan, and investment strategy, please feel free to select a time on my more
Comments
