Tariff-ying Times

After setting an all-time high on February 19th of this year, U.S. equities have had a wild ride.  The obvious contributing factor to the drop in values is the new tariff policies.  Over the past month, the United States has significantly escalated its tariff policies under President Donald Trump's administration. On April 2, 2025, the "Liberation Day" tariffs were introduced, imposing a 10% baseline tariff on all countries and implementing reciprocal tariffs targeting nations with substantial trade deficits with the U.S. These measures have led to heightened tensions with key trading partners. The evolving trade landscape continues to impact global markets and economic stability.

On April 9, 2025, President Trump announced a 90-day pause on the implementation of higher reciprocal tariffs for most U.S. trading partners. This pause affects the elevated country-specific tariffs introduced under the April 2 Reciprocal Tariff Executive Order, which were set to exceed the baseline 10% tariff. While the 10% universal tariff remains in effect for all countries, the higher tariffs are suspended until July 9, 2025, for nations that have not retaliated against the U.S. However, this pause does not apply to China. In response to China's imposition of 84% tariffs on U.S. imports, the U.S. increased tariffs on Chinese goods to 145%, combining the reciprocal tariff with existing levies.

The European Union has also paused its planned retaliatory tariffs in response to the U.S. suspension, with negotiations ongoing. The 90-day pause is intended to provide a window for trade negotiations, but the situation remains fluid, with the potential for further changes depending on the outcomes of these discussions.

These developments have left investors around the world wondering what to do with their investment portfolios in the wake of all this uncertainty.  If more pain comes to investors, it is tempting to sell now and avoid the potential further drawdown of stock prices. 

The problem is that nobody knows for sure what the future holds.  We may have well-formulated theories, but there are no facts about the future.  Given the extreme volatility of President Trump's temperament, the proposed tariff rates and the pause of these rates may change any number of times in a handful of days.  This has already happened.  No serious investor can make investment policy out of the waxing and waning of his tariff threats, nor the media's hysterical responses to those threats.  Tariffs will end up being whatever they are, and the world's great companies will immediately begin working around them, as they always do.  That's why we own them.

During times of great volatility, it can be helpful to widen our perspective of the investing process as a whole and then to see where volatility fits into that process.  Successful investing starts with a long-term plan for the achievement of your most cherished lifetime financial goals.  Earning the highest rate of return possible over a given time period is not a reasonable goal.  There will always be a particular security out of the thousands available to investors that performs the best each year.  Identifying them in advance is nothing more than speculation, not investing.

Once our lifetime financial goals are identified, we can then create a portfolio whose historical long-term return matches the target. Investing with any confidence about the outcome only works over the long term.  The chart below shows the best, worst, and average rates of return for U.S. stocks and Treasury bonds, and these two asset classes blended together over various time periods.  As you can see, the longer the time period, the more predictable the returns become.  You may also notice that worst-case scenarios in the 20-year periods are all positive. 

After we have invested in a diversified portfolio designed to reach our long-term goals, each passing trading day will alter our preferred allocation as some sectors outperform and others underperform. After large market movements, the imbalance may become extreme. 

But, if you commit to the original mix, you will do the exact opposite of what human nature screams for you to do: sell some of the outperformers and acquire more of the laggards.  This practice, called rebalancing, forces us in uncertain times to sell some of the bonds that have cushioned the blow of stocks and buy more stocks at better prices.  Rebalancing, by its nature, is different than timing the markets.  Rebalancing simply acknowledges our commitment to our original mix and lifetime goals.

We all wish we could know in advance if these new tariffs will be a quick renegotiation or the beginning of a trade war.  Even though this is unknowable, it is also irrelevant to the long-term success of the plan to reach your goals.

Already in this still young century, the broad equity market essentially halved in the implosion of the dot-com bubble and the Enron and accounting scandals.  It halved again in a global financial crisis, during which the world's credit system at one point ceased to function altogether.  The market declined by a third in barely a month when a deadly hundred-year plague spread around the world in 2020.  It dropped 25% in ten months in 2022 when hyperinflation briefly threatened, and the Fed engineered the faster, steepest rate hike in history.  Yet, a $10,000 investment in the S&P 500 at the beginning of 2000, right before the bubble burst, and left alone to compound without interfering or selling during times of turmoil, had grown to over $66,000 at the end of 2024.  At no time during these crises could anyone tell us how and when the situation would be resolved, much less when and where the market would bottom.  That was the wrong question to ask at the time, and it remains so now.  Throughout history, even the most existential crises have been overwhelmed by the world's great companies.  Human ingenuity and problem-solving will prevail as long as they have a profit motive.