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On April 2 the US announced tariffs on a large portion of imported goods.
While new tariffs were not surprising, the magnitude of the tariffs significantly exceeded expectations.
Stock indexes ended the week with substantial losses, as shown in the table below.
Many experts and institutions have ramped up predictions of recession, and expressed fears of inflation or even
stagflation.
While many have been selling stocks to avoid further losses, a surprising number of retail investors are buying the dip.
Who is right?
Let’s discuss some topics related to these tariffs and how they may impact investments.
Uncertainty
A major question is how the tariff rates will end up.
Trump seems convicted to a bigger plan that includes increased tariffs, so
I doubt we’ll get back to Biden-era tariffs without a major battle.
However, the “over-the top” magnitudes announced April 2 seem like a scare tactic,
or a first offer in a series of negotiations before settling on more bearable rates.
(Like what happens to me when I go to a car dealership cold and ask: “how much for that one?”)
Also realize these tariffs are not fully supported politically.
The senate bipartisanly voted to terminate the national emergency on which Trump based the tariffs (the House may not).
The legality
of these tariffs being created by executive order and the power of congress to change them is not 100% clear.
The executive order itself
includes
a number of conditions on which the tariffs may be modified going forward.
In short, I can’t believe anyone knows how this will play out.
Which countries will escalate, which will negotiate, will the US itself back down due to legality or popularity, …?
The extent to which consumers will pay tariffs versus producers and importers is fuzzy. Likewise for the number of job cuts as sales decline.
The flip side
Before you sell all your stocks, recall two other Trump campaign promises: deregulation and tax reduction.
Furthermore, as we’ll see below, the magnitude or number of Fed rate cuts may increase as a result of these tariffs.
All of these events could boost equity values later this year.
Words from the wise
Most experienced wealth managers are telling investors to stick to their long-term plans.
Cliff Ambrose, wealth manager at Apex Wealth, says most investors should ignore changes in tariff policies.
"While tariffs can influence market conditions,
it's generally not a good idea to make drastic changes to your investment strategy based on short-term
policy shifts," Ambrose says.
"Tweaking your strategy too often in reaction to things like tariffs can lead to
poor timing of decisions or increased fees from frequent trading."
In my opinion, events like this are an opportunity to at least remind investors to check that they have a solid plan.
If you already have a good plan, there’s probably nothing to change.
However, if you are panicking because you don’t have an
emergency fund, then let this serve as a lesson.
It’s also a good time to double-check your asset allocation.
If you’ve been all in on US growth stocks you’re probably feeling a lot of pain now.
Don’t forget about the only free lunch in investing: diversification.
If you’re overweight in bonds, perhaps you’re smiling now.
However, the long-term is generally not good for bonds.
If equities fall to favorable valuations,
this could be an excellent time to shift toward equities.
Magnitude
These tariffs are estimated to raise about $600 billion in a year, if they hold up as is (a big if).
While $600 billion is a lot, it’s only 2% of the $30 trillion economy, which is quite diversified.
Costs to watch out for
Food
Mexico and Canada provide almost half of US food imports.
It’s unlikely they will absorb the full cost of tariffs, expect to spend a few percent more in the grocery store.
Cars
Tariffs are specified to be 25% on any vehicle not assembled in the US, which was almost half of US car sales last year.
Estimates of 40B USD tariffs on 6M imported vehicles corresponds to almost $7k per car!
Even autos made in the US use imported parts.
For example, the Ford F-150 has 2,700 billable parts from at least 24 different countries.
Ford CEO Jim Farley has expressed that
the
advantages to US autos will be highly dependent on how those parts are tariffed.
Market predictions
Most predictions of GDP growth
have
dropped from over 2% to below 1% since April 2.
Estimates of inflation have grown from 2.5% to just over 3%.
Some are warning of a recession or even stagflation, but that appears to be a minority at this point.
The majority view the threat to growth as more serious than the threat to inflation.
As such, predictions of Fed rate cuts have increased, which would help soften the blow to equities.
While tariffs have certainly increased volatility, Blackrock CIO of fundamental equities Tony Despirito says they
don’t
impact his long-term outlook for fundamentally sound businesses.
Conclusion
The tariffs announced April 2 exceeded most expectations and hence cut equity prices sharply.
Long-term, it’s likely the tariffs will change, and I don’t know anyone with much certainty on how all this will pan out.
As such, changing asset allocation around this will likely be a waste of time and money.
As investors, the most important thing we can do is maintain a solid financial plan.
If you really want to do something, perhaps you could rebalance (you should be doing this periodically regardless).
Sure, the tariffs could reduce equity returns this year but, as usual, that was priced in as soon as people could decipher it.
Trying to jump in and out of the markets around events like this typically leads to lower long-term returns.
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