Tariffs Galore

With the recent tariff communication from the White House, we wanted to put together some high-level thoughts surrounding the announcement.

What was announced in the communication and how does that compare to expectations?

  • Across the board tariffs on countries' imported goods were announced at a minimum rate of 10%. Countries that have imposed higher tariff rates and/or have large trade deficits with the US are subject to higher US tariff rates. This so called "reciprocal light" list involves 60 countries and includes some major economies like China (34% tariff), Europe (20% tariff), Japan (24% tariff), and India (26% tariff) (with the above specified rates that are incremental to existing agreements.
  • These tariffs were generally broader and larger than expected and sum to around $475b in tariff revenue on top of the roughly $150b in existing tariffs that have been announced previously (China, non-US autos, Mexico/Canada on noncompliant USMCA goods, Steel/Aluminum).
  • For context, new tariffs totaling about $625b in revenue are materially significant representing about 2% of US GDP and translate to a 10 fold increase in the US Effective Tariff Rate going from roughly 2% to 20% – highest since pre-WWII.
  • If the above were fully realized (with no offsets), this would be one of the largest tax increases in modern history. As such, the market's reaction with Stocks lower and Treasury bond prices higher (rates lower) suggests a negative growth impact to GDP and earnings.

What's the goal of these policies along with the impact?

  • From our lens, higher tariffs on foreign goods has two main objectives in (1) lowering the budget deficit and (2) accelerating the onshoring of supply chains and production back to the US.
  • Right now it would seem that the incentives are more the "stick" (via tariffs) than the "carrot" though we do think partial offsets to consider would be tax advantages, de-regulation, lower energy prices and looser monetary policy.
  • Until there are viable domestic substitutes for goods that are subject to tariffs, the price level will rise until lower demand dictates. This likely means higher inflation initially that becomes disinflationary should demand falter.
  • Longer term – investment in the US suggests a rebuilding of US capital stock with increased manufacturing capability.

What are the potential reactions to consider?

  • Given the size of the tariffs and to the extent countries believe that they're no longer being used as a negotiation tool, some retaliation is likely (direct or indirect). This leaves open the question regarding the stickiness of inflation which may mean the Fed is slower to react. This also might mean that the expected tariff revenue generated is lower than the headline numbers suggest.
  • The market's reaction might prompt Congress to be more growth oriented in their reconciliation bill – requiring more than just tax cut extensions – as a way to help sterilize the tariff impact.
  • The tariff effect will be absorbed by companies, consumers or a combination of the two. Ultimately, should demand be impacted, the Fed will react in lowering rates amid rising recessionary fears.

Is there a silver lining?

  • S&P 500 earnings growth started 2025 from a favorable position with double-digit growth expected.
  • With a 4.25-4.50% Fed Funds rate, the Fed has room to cut.
  • The combination of the tariff revenue and reduced government spending likely means the deficit is headed in the right direction and provides some flexibility for Congress on fiscal spending.
  • According to Strategas Research Partners, periods of significant spikes in policy uncertainty (like today) are historically followed by above forward returns over the next 12 months.

Portfolio Positioning

  • Coming into this year, we've continued to emphasize the importance of diversification and balance as a way to mitigate high uncertainty.
  • Additionally, earlier this year we took some profits in US Large Caps and added to our Overweight in US Core Fixed Income. Our tilt toward International markets has benefited from recent market (non-US > US) and currency (dollar weakness) trends. In so doing, we remain Underweight the most expensive and concentrated areas of the market where we've viewed the long-term risk reward less favorably.

Final Considerations

  • Stay focused on the things you can control like ensuring you have adequate 6-12 month liquidity needs which should allow your long-term investment monies to stay invested.
  • Has the structural integrity of your plan changed (purpose of money, time horizon, liquidity needs, risk tolerance)? If the answer is no, then recognize that the economy and the market run in cycles that diversified portfolios are there to help mitigate.
  • Short term volatility is often the price you pay for higher long-term returns.