However, there is uncertainty regarding the impact of recently declared US tariffs on global trade and economic growth. The key question is whether tariffs can effectively achieve trade neutrality among trading nations through reciprocity or if trading partners will respond with retaliatory barriers that result in higher protectionist tariffs against American goods. This is a concern because approximately 40% of large American public company revenue comes from foreign markets.
The possibility that tariffs may become permanent and last beyond short-term negotiations is contributing to the stock market sell-off that could lead to a bear market (20% or greater decline) and recession. Protectionist barriers increase costs for imported goods, affecting corporate margins and earnings. If businesses cut costs in response, unemployment rates could rise, further impacting consumer spending. Historical context suggests this could lead to significant economic downturns, although the purchasing power of the US market remains a significant factor in negotiating lower tariffs on US goods.
Additionally, this shift in tariff policy seems to be encouraging Congress to pursue tax relief, government spending cuts, and reduced mandates/regulations to counterbalance the economic impact of tariffs. These factors will influence financial markets in the coming quarters until there is more clarity on trading partners’ willingness to negotiate towards equilibrium, tax and regulatory reform, corporate earnings, inflation, employment, and interest rates.
One risk is that US negotiators might focus solely on realigning trade deficits rather than reciprocal tariffs. Removing VAT (value added tax), industrial subsidies, restrictive trading regulations, and altering consumer spending habits is complex and challenging.
US companies and individual investors demonstrated resilience during Covid pandemic supply chain disruptions, though it required time and patience. It is hoped that similar resilience will emerge amidst current uncertainties. Market history indicates that short-term volatility driven by fear is followed by economic adjustments where products and services ultimately meet consumer needs and demands. A predominantly free market should eventually address the challenges of the altered global trade environment with less severe economic impact than initially feared.
Given recent market volatility and uncertainty surrounding tariffs, we recommend maintaining the asset allocated, broadly diversified, income oriented plan already in place as markets are expected to fluctuate with ongoing news. Despite anticipated volatility, longer-term results are likely to be positive due to other countries’ need to maintain trading relationships with the powerful US economy. It is crucial for Congress to enact tax, spending, and regulatory cuts to sustain economic strength as tariff negotiations proceed.
