Let’s discuss tariffs…
Tariffs are front and center in the news right now and the main concern on the mind of many clients, so let me offer some thoughts on what’s going on right now in regards to tariffs.
As a general rule, tariffs are NOT good for the economy or the market if they are used as a long-term strategy.
For context, let’s look back in history. The Smoot-Hawley Tariff Act of 1930 raised tariffs on imported goods to protect American businesses and farmers. It was signed into law by President Herbert Hoover. The act increased tariffs by an average of 40–60%, which led to a decline in global trade by 65%. The act also made it more expensive to sell goods from foreign countries, which caused many countries to stop shipping their products to the United States. It also contributed to the worsening of the Great Depression.
Now, before folks panic, my hunch and strong belief, is that President Trump is using tariffs as a SHORT-TERM tool to get more favorable trading terms with other countries who, to quote him, “have been ripping us off!”
If tariffs are indeed short-term, then I would buy the dip in this market and thank President Trump for not only putting the US on better financial footing from a trade perspective, but also for causing the market to trade at a discount from where it was just a few weeks earlier allowing me and you as investors, to buy investments at a discounted price.
On the other hand, if these tariffs ARE imposed for the long-term, it may be problematic because trade will go down, products will become more expensive, and the market will be choppy.
Keep in mind that from 2018 when the first round of tariffs were introduced, most businesses and individuals did not notice a difference because the impact was so modest, but it’s unclear what will happen this time around.
The impact so far on the market is worth mentioning:
Currently, the S&P 500 is now down for the year, but the bigger concern for the market is NOT actually tariffs, rather it’s the market itself. As I say often, the S&P 500 is heavily weighted towards the “Magnificent 7” stocks, which has pushed the index, particularly in terms of mega-cap and growth stocks. Valuations are also high. While not catastrophic, this certainly contributes to increased market uncertainty.
Interestingly, despite tariffs, there has been VERY strong performance for Non-US Developed Markets: These international markets have performed well. As of this recording developed non-us market are up 9% year-to-date, highlighting the importance of global diversification.
Additionally, bonds have been up 3% year-to-date, providing stability amid volatile stock performance.
This is EXACTLY why we diversify. If you are a client of ParkBridge Wealth Management, you have both international AND bond exposure in your portfolio and are weathering this storm quite well and have nothing to worry about.
Given that context, here is the takeaway for all investors: If you are a long-term investor and have a respectable cash cushion to whether the higher prices caused by tariffs, then these events won’t impact your life too badly. The market will come back, you can afford the higher prices, and ultimately tariffs will be removed or come down dramatically.
However, if you’re a short-term investor and don’t have ample cash flow or savings, then these tariffs will likely be disruptive.
Personally, I would take a step back, take a breath, and would advise folks to wait and see how things play out before stressing out over something that may no longer be relevant within a few months.
We will get through these turbulent markets and nerve racking headlines. I promise!