I would like to touch on the recent market fluctuations and explore strategies for maintaining a composed and thoughtful reaction.
Tariff Rate Surprise on April 2nd
As background, tariff increases were announced on April 2nd that were 60 - 80 % higher than the market expected. The high level of tariff rates surprised the market and contributed to declines in US stocks. Last Friday, international stocks saw increased volatility as countries began to retaliate against US tariffs.
Dr. David Kelly, Chief Global Strategist at JP Morgan, explained the tariff rate calculation with the analogy below.
Imagine a town with a tailor and a doctor. Over a year, the tailor spends $20,000 on medical services at the doctor's office, while the doctor spends only $5,000 on tailoring. The tailor, feeling shortchanged because he only received $5,000 in payments, imposes a 75% tariff on the doctor’s “trade surplus” ($15,000 divided by $20,000). Essentially, the tailor is trying to correct an imbalance in payments, rather than trying to correct a tariff imbalance. This 'trade deficit' seems to be the focus of the administration's trade policy calculation rather than reciprocal tariffs.
Markets are trying to assess the potential impact of the higher tariff rates.
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Tariffs are taxes that are inflationary in nature. How will companies try to pass on tariffs on the goods they sell to the US consumer?
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The market forecasted the Federal Reserve would reduce rates in 2025. Now, the Fed wants to 'wait and see' how tariffs play out before changing rates.
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If tariffs are implemented, could economic growth slow? Economists are predicting between 1 - 2% reduction in economic output. For example, if a sneaker price goes from $130 to $200, it is likely to reduce purchases.
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Will other countries retaliate against the US? In particular, will they target our high tech and software companies that are largely excluded from tariffs?
Tariff Pause on April 9th
On April 9th, President Trump announced a pause in the higher tariffs for 90 days.
The temporary ninety day pause in tariff implementation allows the trade negotiation process to proceed without the burden of the much higher rates.
US Economic Strengths to Keep in Mind
While it's easy to focus on the downside risks of tariffs, the US economy has certain strengths that are worth reviewing during volatility:
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The US is the world's largest importer meaning there is leverage in negotiations with other countries.
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Our economy is largely service based which makes it more resilient to manufacturing shocks caused by goods tariffs.
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The US unemployment rate is still historically low, and job openings are still robust.
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US capital spending and investment in technology and productivity enhancing AI is still intact and harder to derail because the projects are long term in nature.
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The 2017 Tax Cut and Jobs Act individual rates are likely to be extended in Congress which could provide additional fiscal support to the economy.
While there is more potential risk of recession than when we began the year, recession is not a certainty.
How to Respond to this Uncertain Market
Let's talk about how to respond to uncertainty in markets.
First, it is helpful to reduce the amount of news you consume. The blinking red lights, scrolling news stories, and all caps' headlines are meant to attract your attention and sell advertising, not provide sound investing advice.
Next, think about your plans for your business:
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Identify potential domestic substitutes for foreign made products that may be subject to tariffs. i.e., switching glove manufacturers or product specs, sourcing US based raw materials for manufactured goods rather than foreign.
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Review your liquidity cushion. Do you need a line of credit to use for one-time payments? Do you have enough personal liquidity to withstand a demand shift?
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Review inventory costs. How will tariffs change your inventory costs?Will you need to delay purchases? Should new contracts include increased costs due to tariffs or a tariff pass-thru clause?
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Review open jobs to see if they are still necessary given potential changes in consumer demand due to higher tariff rates.
Last, do not try to time the market fluctuations.
Over time, data shows markets can overcome periods of uncertainty and continue to rise.
See chart below for S&P 500 performance from the past ~100 years. THINK LONG TERM when you consider how to approach your investments.
Time IN the market is more important than timing the market. Don't try it! Check out the chart below showing the impacts of missing the best 100 days in the market.
Reach out if you would like to chat!
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