Navigating the Tariff Tightrope: Understanding the Market Impact

What's shaking up Wall Street lately – if you're reading this you have probably already read several articles, watched tv programs and seen the headlines. Tariffs is the topic of conversation lately and there's no denying its impact across the globe. The ongoing tango is sending ripples through our portfolios and no place is safe right now. There are some sectors that are faring better than others, but it's mainly a sea of red right now. It feels like every headline screams about trade wars and market volatility, and it's easy to get caught up in the frenzy. Terror, chaos, your retirement nest egg at risk - yeah, that'll grab anyone's attention. But as seasoned investors know, it's during these times that a cool head and a long-term perspective are your most valuable assets.

The Tariff Tightrope: Sector-Specific Impacts

This isn't a blanket hit on the entire market though; the pain is being felt unevenly. It's like a tug of war between an adult and child when it's time to give up their electronics. (I actually have most children winning that one if it wasn't so obvious!). Certain sectors are bearing the brunt of these tariffs, while others are proving more resilient, or even finding unexpected tailwinds.   

Manufacturing and Industrials: These sectors are often directly in the crosshairs. Like a bulls eye on the back of a segment of our economy. Tariffs on imported raw materials drive up costs for American manufacturers, potentially squeezing profit margins and making their goods less competitive globally. Most things, even made domestically, rely on goods imported. Conversely, domestic manufacturers might see a slight uptick in demand if tariffs make imported goods pricier. Cha-Ching - well, sorta. We're seeing companies in steel, aluminum, and machinery closely watching how these policies evolve. If I were the CEO I would have been watching like a hawk for months now; and sure enough that's just what many of them did. Some even took action and ramped up ordering after knowing the results of our election. Afterall, the President did run a campaign on leveling the playing field. For example, a tariff on imported steel could benefit domestic steel producers like, but it raises costs for automakers and construction companies. I know you're probably thinking Ford, GM, and Dodge are going to panic, but that's not the entire story on autos. There are rumors of additional incentives for people buying domestically made vehicles. More to come on that as they evolve.    

Technology: The tech sector, with its intricate global supply chains, is particularly vulnerable. The word "vulnerable" is not something most investors would associate with the tech stocks because they've been on quite a tear over the past decade. Tariffs on electronic components and finished goods imported from countries like China can significantly impact profit margins for companies like Apple and Dell. Who wants that? Paying more for a new cell phone or computer - no thanks. Moreover, retaliatory tariffs can limit their access to crucial overseas markets. Nothing is final until its final. And even then, it can change as it has.   

Agriculture: Farmers are often on the front lines of trade disputes. Of course they're not, they're working day and night to properly plant, harvest and cultivate their crop and tend to their farms. Retaliatory tariffs on agricultural exports like soybeans, corn, and pork can severely impact their livelihoods and create significant market uncertainty. Agriculture based companies have their eyes peeled on what's in store for them and how they'll be impacted.   

Consumer Goods: Tariffs on imported consumer goods like household cleaning products can lead to higher prices for everyday items. That could have an impact on consumer spending and the profitability of retailers. People will be faced with decisions they'll have to make based on brand, cost and quality.

Energy: The energy sector's exposure is more nuanced. I have been a fan of the sector these past few years and they have performed quite well. Tariffs on steel could increase costs for pipeline projects, higher prices for imported oil due to geopolitical tensions, but things are a little more complex than just that. Sometimes theses disputes can lead to benefit domestic oil producers.

Global Recession: A Possibility, Not a Probability (Yet)

The question on everyone's mind: are these trade skirmishes leading us down the path to a global recession? If you rely solely on social media or mainstream media you might think that is eminent. While it's certainly a possible outcome, it's not something I view as a base case right now. Our current path is not a positive one so we can't dismiss the notion entirely. I currently lean towards some type of resolution between the nations and a relatively low probability of happening. Here's my thesis:

Strong Underlying Fundamentals: Despite the trade chaos, the underlying economic fundamentals in many major economies, including the U.S., remain relatively solid. Just a short time ago the most common question was, where can I make more money? That tune has change dramatically over just the past few weeks. We're still seeing decent employment numbers and consumer spending, which are crucial drivers of economic growth. There are some business owners I've spoken to that are nervous about the impact of tariffs, but that is not the majority.    

Central Bank Intervention: Central banks across the globe are closely monitoring the situation and have shown a willingness to step in with accommodative monetary policies if the economic outlook deteriorates significantly. Domestically, we raised rates over the past couple of years so there is some room to take action if need be. Rate cuts or other measures could help cushion the impact of trade disputes; not to mention an opportunity to refinance some of the nation's debt. That could be a positive takeaway, if there is something that remotely resembles a silver lining.

Negotiation Potential: Trade negotiations seem to move faster than the speed of light. There's always the possibility of breakthroughs and resolutions that could ease tensions and remove some of the economic headwinds. Who knows, something even as soon as a couple of days after the publishing of this blog!?

Diversified Global Growth: While some regions might be more affected by the trade war, other parts of the world might continue to experience growth, providing a buffer against a widespread global downturn. China and other foreign markets were leaders to start the year off, but that momentum has slowed and may grow increasingly more challenging. I am not in the camp of dramatically increasing foreign exposure at this time. If rates continue to lower, equities trading at lower multiples, US currency could also be devalued which will make things less attractive outside of the country.

Resilient Corporate Sector: This isn't their first rodeo. Many of the corporate leaders have been through violent changes in cost of products, tax regulation and other factors that can quickly change the outlook of profits. It can also mean the difference between more leveraged companies remaining solvent in times of rapid change. They won't be able to borrow fast enough and adapt to the changing market. We've seen small cap stocks take it on the chin nearing an almost 18% ytd drag down. With all that being said, many corporations have adapted to global trade dynamics and have diversified their supply chains to mitigate risks. Leaders have teams analyzing the potential impact and they take swift action without hesitation.   

However, it's crucial to acknowledge the downside risks and there are several. A significant escalation of tariffs, prolonged uncertainty, and a breakdown in global trade relationships could certainly dampen economic activity and potentially trigger a recession. Some argue we're already in one. In many instances this can be true. We have zero clue we're in the midst of one until things start to unwind months down the road. Our firm has never invested a cent with a "what if the sky's falling" mentality. We are expected to be good stewards of our clients assets and to remain diligent in our research. Readers and clients expect that we'll continue to examine the situation closely and take action when action is required.

Keep Calm and Carry On (Investing-Wise)

In times like these, the not so fun times, there is an urge to react impulsively to market swings and that can be a powerful force to overcome. However, history has repeatedly shown that making rash investment decisions based on fear or short-term noise is often detrimental to long-term returns. That's putting it lightly. I have countless stories of new clients to the firm reminiscing about the mistakes they've made in 2008, 2011, 2018, and especially 2020. Part of the reason people "hire" wealth advisors is to avoid pitfalls; the mistakes we all make when we know better, but still do the wrong thing.

This isn't a new concept but let's consider this sobering thought: missing just the ten best trading days each year over the past 40 years could dramatically reduce your overall returns. Which are the ten best days? Good luck getting those right; its basically picking a needle in a haystack. Studies show that being on the sidelines during these peak performance days can lead to significantly lower portfolio growth compared to staying invested through the ups and downs. Sound like a bunch of jargon your financial advisor tells you so they can sit on their hands and make you ride it out? Nope, it's true and very valid. I've seen several clients try to avoid market downturns in a separate account they manage on their own and the story never ends well. You'll always want to get out when the pain no longer seems bearable. That is probably the worst absolute time to make that kind of decision. Trying to time the market perfectly is a fool's errand; you're far more likely to miss out on crucial gains.   

Silver Linings in the Downturn? Absolutely.

While market downturns can be unsettling, they also present potential opportunities - yes, you right that right. Things like:

Government Debt Refinancing: I mentioned this earlier in the article and it's something worth touching on. A significant and sustained downturn often leads to lower interest rates. This presents a golden and I mean golden opportunity for the government to refinance its long-term debt at more favorable rates, potentially saving taxpayers money down the line. I know this doesn't help much for the near term, but it's like paying off a loan shark that you know will come for you one day.

Reshoring and Fairer Trade: These trade tensions, scare tactics, rants, power struggles or whatever you want to call them, could ultimately lead to the benefit of having more jobs on American soil. It seems undoable, but as companies reconsider their global supply chains, it's a possibility. Furthermore, it's an opportunity to push for more equitable trading terms with countries around the world, ensuring a level playing field for American businesses. We've been abused, kicked around and treated like crap for decades. This abuse has been masked with us having access to lower cost products which everyone loves while things are cheap. The U.S. is a massive consumer of global products and people have been cheering this for years. It's like a spoiled child that only finds happiness consuming chocolate bars then cries when he doesn't get one. Ultimately it's going to be bad news for her long term health although it puts a smile on his face while he indulges in a tasty candy bar loaded with sugar and countless calories.

Proposed Tax Incentives: The current administration's proposed tax incentives, such as no income tax for those earning under $150,000 and no tax on auto loan payments for domestically manufactured vehicles, could provide a substantial boost to consumer spending and the domestic auto industry, helping to offset some of the negative impacts of the trade war. The math on that is hard to explore right now and it'll be difficult until some of these programs are formally presented. I do think about the people who would benefit most from those segments and it fits the bill of the middle-class family making less than $150,000 and retired folks on a fixed income. That's a huge portion of our population. Time will tell as these develop, but the overall concept is promising.

Look What the DOGE dragged in: Uncovering Fraud: While perhaps an unconventional example, the recent surge and attention surrounding Dogecoin (DOGE) has inadvertently led to the uncovering of millions of dollars in fraudulent spending and illicit activities on certain platforms. There is some argument on the legality of DOGE and some privacy debate on information sharing it's clear that there is a divide on the process of gathering this information. Some question the data's accuracy and dismiss the results all together. Even if a fraction of what they've uncovered is correct, it could mean sweeping reform and the recovery of stolen assets. This unexpected consequence highlights how even volatile assets can sometimes play a role in revealing broader financial irregularities.

The Long Game: Patience is a Virtue

It's tough to see red in your portfolio, more so for those that are at or nearing retirement. We all need to digest and remember that investing is a marathon, not a sprint. There will be obstacles we encounter that we could never have dreamed up. Investment planning is a living breathing thing that We make a conscious choice of putting capitol to work knowing the market will fluctuate and we will lose money at times. How long? Nobody knows how long and when it'll happen; just know that it will. Five years down the road, this period of uncertainty and potential downturn could very well be viewed as an imperative time to invest. That doesn't necessarily mean adding new funds to your account. Think of dividend reinvestments of your stocks, mutual funds and ETFS. Market corrections are a natural part of the economic cycle, and they often create opportunities to buy quality assets at discounted prices. No, they're never fun or seem like an opportunity for anything but a heart attack. They are a necessary and fundamental part of any investment portfolio.   

While the current tariff war and its impact on the stock market are undoubtedly causing volatility and concern (I'm sure you're thinking - duh), it's crucial to maintain a long-term perspective, avoid impulsive decisions, and recognize the potential silver linings that could emerge down the road. Most of our long term clients endure this and have embraced the times they know don't always make them feel uncomfortable. The truth is it's always the "scariest time" when you're in the midst of losing your shirt. It's what shakes out the novice investor. The "I can be an advisor too" kind of person who happens to have owned some of the luckiest crypto picks or stocks for a short bull run and feel like they have the power of god in their fingertips. This too shall pass, and those who remain disciplined and focused on their long-term goals are more likely to weather the storm and reap the rewards in the years to come. There's no secret to investing. Own good stocks of companies that have sustainable business models and continue to grow their revenues. That's it. When the music stops and the hype of a sector or stock is over, you're left with earnings and they never lie. It may take time for their share price to reflect that, but that's what we call opportunity. Stay calm, do your research, talk to your advisor or one of ours and remember why you started investing in the first place.

All performance referenced is historical and is no guarantee of future results.

All indices are unmanaged and may not be invested into directly.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Investing includes risks, including fluctuating prices and loss of principal.

No strategy assures success or protects against loss.

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