We often hear the phrase, ‘This time, it’s different.’ While the specifics may change, the constants are human behavior and, more importantly, investor behavior. Time and again, emotional reactions cloud judgment, making the statement seem irrational—yet history has proven its truth countless times.
Morgan Housel, in The Psychology of Money, captures this well: 'Optimism sounds like a sales pitch. Pessimism sounds like someone trying to help you… Pessimism just sounds smarter and more plausible than optimism. Tell someone everything will be great, and they’re likely to shrug it off. Tell someone they’re in danger, and you’ve captured their full attention.'
As investors, the truth lies somewhere between these two extremes. Our job is to look at the facts and data to actively navigate the markets and the world around us.
Federal Reserve Chair Jerome Powell said today he expects President Donald Trump's current tariff policy will hike prices and slow economic growth, while noting that key indicators "still show a solid economy." As we know, President Trump announced new tariffs on nearly all major trading partners. These tariffs are “reciprocal” in that they correspond to tariffs each country imposes on U.S. goods and are on top of previously announced duties. The average tariff rate across countries is 25%, with rates for some as high as 49%. While the implementation of these tariffs was widely telegraphed by the White House, the level and scope are greater than many investors and economists expected. The immediate market reaction was negative, with the S&P 500 declining over 3% and the 10-year Treasury yield declining to around 4%.
Let’s cover some of the key facts. The newly announced tariff measures have been set at a minimum 10% rate, with levels varying based on the U.S. trade deficit with each country. China, for instance, faces a reciprocal tariff rate of 34%, which is in addition to 20% tariffs previously announced. The European Union will be subject to 20% tariffs, while Canada and Mexico will not be immediately impacted by new reciprocal tariffs and are instead subject to the previously announced 25% tariffs. There is also an across-the-board 25% tariff on all imported automobiles, effective immediately.
The United States has a long history of tariffs, and in fact they were the primary source of federal revenue prior to the establishment of the federal income tax system in 1913. However, they fell out of favor after World War II as globalization took hold.
The administration’s arguments for tariffs are to raise revenues and ensure economic fairness, especially in the manufacturing sector – a policy it has dubbed “make America wealthy again.” President Trump’s long-stated goal of reducing the trade deficit and the view that trade is unfairly balanced were on display in his April 2 speech.
Perhaps the most important perspective for long-term investors is that this shift in trade policy will be an ongoing process. The current round of tariffs truly began after the presidential inauguration, with the “America First Trade Policy” signed on January 20. These latest moves show that the administration's goal is to make significant changes, but even these could be negotiated with each country over time.
How does this affect markets and companies? The general fear is that tariffs could spur inflation and slow economic activity. While some domestic manufacturers might benefit from less foreign competition, markets tend to view trade barriers as negative for corporate profits, at least in the near term. Just as in the past, new trade policies force businesses to reconsider how they operate. They may adjust their sourcing strategies and can consider absorbing portions of the tariffs themselves.
In response to the 2018 tariffs, a portion of S&P 500 companies shifted their supply chains out of countries like China to reduce the impact from tariffs. These corporations relocated manufacturing facilities, found alternative suppliers, or adjusted their global production networks. While this can help companies navigate this latest round of tariffs, it takes time to adjust supply chains.
The S&P 500 sectors that are most directly impacted could be the ones with the greatest proportion of revenues coming from international sources. Nearly 30% of S&P 500 sales come from overseas, with information technology, materials, communication services, consumer staples and energy having the largest exposures according to Standard & Poor’s.
Despite the immediate market reaction, it will take time for the true impact of these trade policy changes to play out. In recent years, investors have faced numerous market concerns including the pandemic, inflation, the possibility of a Fed policy error, recession fears, and more. Each of these challenges likely felt insurmountable at the time.
Yet, markets not only recovered, but rose to new levels. While the past is no guarantee of the future, there are many reasons to believe markets and the economy can eventually move past the current set of concerns.
Perhaps Warren Buffett said it best in 2008, during the middle of the global financial crisis: "In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”
Although markets can be unsettling, history shows that keeping a long-term perspective is the best way to stay on track to achieve your financial goals. As investors, it is important to focus on what we can control. There is a lot of conflicting noise coming from all sources of media. Considering recent market moves and policy changes, the best approach is still to stay focused on the long run and stick to your personalized financial plan and goals. As always, we are here if you want to talk...
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