The administration’s trade war is officially in full swing. Since their sweeping tariff announcement, stocks have sold off roughly 13–15% — depending on the index you use. We haven’t seen this kind of volatility since the Russian invasion of Ukraine back in February 2022. That was three years ago, and maybe our memories have faded a bit as to how that felt.
The scope of this selloff isn’t unusual at all. In nearly 30 years in business, we’ve witnessed countless versions of this. It’s also not accurate to say this time it’s different. They’re all different. The questions now are: how far does this go, and what will a recovery look like? The answers to those are unknowable — and with today’s polarized news coverage, it’s hard to get an unbiased assessment of the situation. We’re going to try and break down what’s really going on.
I would categorize the Trump presidency style as, among other things, a populist one. One of the hallmarks of populism is trade protectionism. He has stated time and again that he wants to see the return of this country’s manufacturing base — and, per his spokespeople, this is how you do it. The main goal is to force domestic firms to move production back to the U.S., and to incentivize foreign companies to produce in the U.S. the goods they sell here.
These goals have merit. For decades, domestic manufacturing has moved offshore, to the point where we can no longer make many of our most essential goods — everything from computer chips to pharmaceuticals. This has put us in a precarious position. If COVID taught us anything, it’s how vulnerable we’ve become. It’s fair to debate whether these new measures are the right way to address the issue — but there’s really no debate about the issue itself.
As consumers, we’ve benefited greatly from these global trade agreements. The stock market liked the profit margins, and consumers enjoyed lower prices. One reason inflation remained so low for so long is that we were essentially exporting it — to China, Mexico, and other low-cost producers. In the interest of keeping the good times rolling, our policies have continually encouraged stretching our supply chains across the world. And we’ve been willing to look the other way when countries like China steal intellectual property or bend the rules — for instance, routing goods through a third country to relabel the origin. It’s no different than money laundering. But hey, if it means a 70” TV is under $700, we’ll look the other way.
Vietnam has become a meaningful trading partner in recent years. They don’t manufacture much themselves, but they’re conveniently close to China.
To be fair, there are many things we have no business making — shoes, clothing, low-end or simple products, etc. We also can’t grow fruit in the winter or fulfill year-round demand for avocados. The focus needs to be on high-end, technically sophisticated, and strategically important goods. These would be things like semiconductors, tools, steel, and similar products
The announced tariffs are breathtaking in scope, and if fully implemented, they would rewrite decades of global trade agreements. Since the U.S. is the largest trading partner for virtually every exporting country in the world, this will affect everyone. Businesses across the supply chain now face the prospect of repositioning inventories and adjusting production schedules for what could become a very different price and demand environment. Not knowing how permanent these tariffs will be makes it especially challenging. Just today, Audi, Jaguar, and Land Rover announced they are temporarily suspending shipments of new vehicles to the U.S. This is a perfect example of what the market is trying to price in. A global recession is a legitimate concern.
If you parse the announcement, there appear to be two components — a 10% base level and various tiers above that. Our guess is that Trump sees the 10% as a more permanent figure, with the higher levels used as leverage to negotiate trade and manufacturing concessions. But it’s hard to know exactly what the administration is aiming for. It would take years to ramp up any meaningful domestic production, and tariff revenue alone won’t solve our fiscal challenges. One would hope this is meant to get everyone’s attention and prompt serious action. If that’s the case, we’d expect the markets to recover relatively quickly as progress is made over the coming months. Otherwise, we could be facing an extended bear market.
In either event, trying to trade in this environment would simply be gambling. Our experience in these situations is to stay put and ride out the volatility. One way or another, this will pass. The people who get into trouble are those who rely on gains every single year. If you’re still working, this environment gives you the opportunity to buy the market at lower prices. If you’re retired — as most of our clients are — the long-term bond yields we’ve locked in over the past couple of years will go a long way toward insulating you from the short-term turmoil in the stock market.
