On April 2, President Trump announced new tariffs on nearly all major trading partners. These tariffs are “reciprocal” in that they correspond to tariffs each country imposes on U.S. goods and are on top of previously announced duties. The average tariff rate across countries is 25%, with rates for some as high as 49%. While the implementation of these tariffs was widely telegraphed by the White House, the level and scope are greater than many investors and economists expected. The immediate market reaction was negative, with the S&P 500 declining over 3% and the 10-year Treasury yield declining to around 4%.
There are many arguments for and against tariffs, and the topic can be politically charged. Regardless of which of these perspectives we may personally espouse, however, we can all acknowledge that the new tariff regime represents a significant disruption to the global economic system.
In times like these it’s important to remember that though markets can be fragile in the short run, they are typically quite resilient in the long run. Over the past century, markets have weathered seismic global economic shifts – including wars, recessions, bubbles, pandemics, political change, and technological revolutions – and have eventually adjusted to each new status quo and its requirements.
At the onset of such a shift it can feel as if markets will never stabilize. Yet history shows that markets can and do overcome even the most significant shocks, often rebounding when it’s least expected. Such eventual re-starts are often sudden and dramatic, as they were in early 2009 after the global financial crisis, in mid-2020 during the pandemic, in late 2022 after an historic interest rate inversion cum technology-led bear market, as well as in countless other examples.
Having the fortitude and discipline to stay invested and stick to a personalized financial plan – or even to take advantage of more attractive valuations – is a key principle to long-term investment success.
The White House has announced reciprocal tariffs
So much for the 35,000-foot view of things. Now let’s cover some of the key facts. The newly announced tariff measures have been set at a minimum 10% rate, with levels varying based on the U.S. trade deficit with each country. China, for instance, faces a reciprocal tariff rate of 34%, which is in addition to 20% tariffs previously announced. The European Union will be subject to 20% tariffs. Canada and Mexico, on the other hand, will not be immediately impacted by new reciprocal tariffs, but are instead subject to the previously-announced 25% tariffs related to illegal immigration and fentanyl. There is also an across-the-board 25% tariff on all imported automobiles, effective immediately.
The United States has a long history of tariffs. In fact, they were the primary source of federal revenue prior to the establishment of the federal income tax system in 1913. However, they fell out of favor after World War II as globalization took hold.
The administration’s arguments for tariffs are to raise revenues and ensure economic fairness, especially in the manufacturing sector – a policy it has dubbed “make America wealthy again.” President Trump’s long-stated goal of reducing the trade deficit and the view that trade is unfairly balanced were on display in his April 2 speech.
Arguments against tariffs are that they effectively tax consumers who ultimately pay higher prices for goods. This is particularly sensitive today due to the inflation that households have experienced over the past few years. Indeed, some historians argue that periods of high tariffs may have worsened the Great Depression and slowed global economic growth in the early 20th Century.
Trade war uncertainty is fueling market volatility
Perhaps the most important perspective for long-term investors is that this shift in trade policy will be an ongoing process. The current round of tariffs truly began after the presidential inauguration, with the “America First Trade Policy” signed on January 20. The president’s trade position has been clear, even if there were questions about what policies would actually be enacted. These latest moves show that the administration is resolved to make significant changes, though some of the announced changes could eventually be re-negotiated over time, as they were during the first Trump administration.
How will this affect specific markets and companies? No one knows for sure. It will take time to truly understand the overall impact. And although some areas will certainly be more affected than others, the general fear is that tariffs could shock the economy, potentially spurring inflation and slowing economic activity. We believe it is because of these vague, but very broad, concerns that markets have already reacted negatively this year.
For example, while some domestic manufacturers might benefit from less foreign competition, markets tend to view trade barriers as negative for corporate profits, at least in the near term. And as they always have in the past, these new trade policies will force businesses to reconsider how they operate. Businesses may adjust their inputs sourcing strategies to lessen potential consumer impact, but they can also consider absorbing portions of the tariffs themselves.
In response to the 2018 tariffs, a portion of S&P 500 companies shifted their supply chains out of countries like China to reduce the impact from tariffs. These corporations relocated manufacturing facilities, found alternative suppliers, or adjusted their global production networks. While this can help companies navigate this latest round of tariffs, it takes time to adjust supply chains.
The S&P 500 sectors that are most directly impacted could be the ones with the greatest proportion of revenues coming from international sources. Nearly 30% of S&P 500 sales come from overseas, with information technology, materials, communication services, consumer staples and energy having the largest exposures according to Standard & Poor’s.
In addition to the impact on revenues, tariffs will likely affect company profit margins by raising costs for foreign-sourced components. Prior to the April 2 announcement, the estimate for 2025 S&P 500 earnings growth had fallen to 11.5% from 14.2% at the start of the year, according to FactSet. That said, it’s important to note that this is occurring at a time when operating margins are historically high and productivity growth is rising. As a result, companies may have some room to maneuver before suffering significant profit declines or raising consumer prices.
One important fact is that a weaker dollar can be positive for both investors and companies as well. When it comes to asset allocation, international stocks have performed better this year, and a weaker dollar means that international assets are potentially more valuable in U.S. dollar terms. For companies, a weaker dollar can spur foreign sales since the cost of U.S. goods sold abroad becomes cheaper for foreign buyers.
Markets usually rise over long timeframes despite major setbacks
It will take time for the true impact of these trade policy changes to play out. In recent years, investors have faced numerous market concerns including the pandemic, inflation, the possibility of a Fed policy error, recession fears, and more. Each of these challenges likely felt insurmountable at the time to some.
Yet, markets not only recovered, but rose to new levels over the following years and decades. While the past is no guarantee of the future, there are many reasons to believe markets and the economy can eventually move past the current set of concerns.
Perhaps Warren Buffett said it best in 2008, during the middle of the global financial crisis: “In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”
This is a helpful reminder that although market swoons can be unsettling, history shows that keeping a long-term perspective while adhering to sound investing principles is the best way to achieve your investment goals.
If you have questions about your personal portfolio with Griffin Black – especially about how our investment philosophy may position clients to better weather this current storm – please give us a call. We’ll be happy to walk you through your own results-to-date compared with the headlines you are probably hearing from the financial media. You may be surprised and pleased.
