All clients — the below five questions/answers are from a discussion that was had just before yesterday’s pause announcement. However, we feel it’s still worth sharing. We still face the April 2nd tariffs in 90 days if nothing changes. That said, change has been the rule in recent weeks.
The pause itself is not far off what we wrote in an update to you at the end of last week: following ”the full shock of the (initial) announcement, markets will sort out what it means in reality and whether deals will be made…perhaps some of the most draconian tariffs will be rolled back under political and market pressure…”
As this is written, yesterday’s big gains are about halved today. The pause is welcome, but we still have a 10% blanket tariff and very aggressive volleys back and forth with China, and 100%+ tariffs both ways. The next few weeks will be telling as quarterly earnings season kicks in and we hear corporate guidance based on ground conditions as they are seen for 2025.
As always, please let us know if you have questions or concerns.
David Beckwith, Chief Investment Officer
1. Why is the current administration doing this and how does it fit into their bigger plan?
Frankly, there is uncertainty as to why last week’s tariff program was put forward as designed, and this is what has rattled the financial markets. The president did indeed run (and governed in his first term) with a pro-tariff stance, and in recent weeks frequently teed up reciprocity, noting that we would charge countries what they charge us. But the new tariff rates actually were calculated very differently, using trade deficits as opposed to a country’s tariff rate, resulting in much higher, ungrounded, and arguably irrational rates from our side.
As an example, the European Union charges tariffs of about 2-3%, but because we buy $605 billion while selling only $370 billion, with that $235 billion deficit representing 39% of the $605 billion import total, President Trump took half that 39% to come up with 20% as our reciprocal tariff on the EU. Do this for Vietnam, who sell us a lot of tee shirts and sneakers but buy relatively little from us, and you get 90% halved to a 46% tariff, not reciprocal at all because they actually charge us and others about 5%.
Globally, if the April 2nd tariffs take full effect, we’d be tariffing the rest of the world, essentially all of our partners, at about 23%, while all other countries are in low-mid single digits, effectively walling us off, while also hindering our economy in other ways that we’ll discuss today.
So, the administration must see this as 1) a general expression of pro-American strength and 2) a way to get countries to the table to negotiate and bring greater rationality to any ongoing tariffs. Markets and economies alike need this to be done, skillfully and relatively soon.
2. How might the new tariffs affect prices and the economy?
We’ve already seen uncertainty and unease about the tariff rollout undermine corporate and consumer confidence over the last several weeks, after fairly robust sentiment and economic performance in 2023 and 2024. Recession odds were rising even before the April 2nd announcement.
This arguably took a turn for the worse after April 2nd. The idea of the new tariffs, touted by Trump’s trade advisor Peter Navarro, is to raise some $600 billion a year for the U.S. Treasury, paid by U.S. importing companies, with presumably much of that passed on to U.S. consumers. At 2.2% of our GDP, that $600 billion would effectively represent the largest tax increase in our history, by a factor of two. Some of that is an effective sales tax, with higher prices for cars, phones, clothing, and food, etc., thus pushing inflation up by an estimated 1-2% on top of today’s 2-3%.
Also, the Trump plan may not recognize that 45% of what we import actually are items used by U.S. companies to make things in the U.S., meaning our companies would be shackled by higher costs and thus might export less. Thus it’s no surprise to see a decline in corporate confidence. According to Blackrock’s CEO Larry Fink, his corporate contacts feel we may be close to if not already in some form of recession.
The longer goal may be to bring manufacturing jobs back here, and we know Trump’s views here date back to the 1980s…but we live in a different world economy today, and one the U.S. has thrived in. We’ve been dominant in terms of economic growth and stability, relative stock market returns, creation of leading companies, and capital formation, a world-beating 75% of that capital now housed in the U.S. It already has been a golden age.
As for bringing back jobs, we are already fully employed….and we certainly don’t want to bring tee shirt production here, and maybe not even auto production. We need these potential workers to fill hundreds of thousands of electrician and electrical engineering jobs as we build out AI, making two or three times the auto job.
We’re really a service economy today, with manufacturing workers only 8% of the workforce. If we eliminate all trade deficits, that might go to 9%, hardly a big transformation or victory.
3. What could this mean for interest rates and how might it shake up the markets (beyond what we’ve seen already)?
Again, this depends on whether the April 2nd tariffs in fact take full effect…. but if so, the combination of a walling off and withdrawal from world trade, eroded corporate and consumer confidence, and the $600 billion burden on companies and consumers, could push us into recession and thus bring interest rates down. Again, we expect some form of tariff walk-backs and country by country negotiation, which could head off a significant amount of the corporate and economic pain, but this of course is still TBD.
As for Federal Reserve rate policy, betting odds of multiple rate cuts have risen since April 2nd, but chair Jay Powell is in the proverbial rock/hard place zone. If inflation is moving in the wrong direction, that is higher, he would be reticent to cut rates, even if economic and at some point employment conditions deteriorate. On April 4th he made indications along these lines, pointing to tariff-push inflation as the new wrench in the works.
While the White House might want them, lower interest rates might have to wait for economic backsliding to overtake the tariff inflation effect before coming down. Also, this might not be market friendly if this comes with low or no GDP growth, a less spirted and less well employed consumer, and an erosion of corporate earnings undermining stocks. Facing this possibility, we are in the volatile phase that we positioned portfolios for heading into 2024. At the same time, we are banking on tariff relief from cooler heads, Congress, market forces and perhaps Trump’s plan all along to force concessions. We will see.
4. How are risks changing in international developed and emerging markets?
The tariffs as laid out would act as a dampener worldwide, given the importance of the U.S. in today’s world economy. Even before April 2nd, new alliances and stronger trading relationships outside of the U.S. were being pursued, across Asia (including Japan/Korea/China), Europe, and South America, among other spots. But all countries would be better off if April 2nd proves to be only a starting point, giving way to a more surgical, intelligent, country by country and interregional trade negotiation approach.
We would continue to include non-U.S. stocks, but in an inclusive pan-regional fashion. Picking winning and losing countries is probably foolhardy given the tariff uncertainty.
To take two examples, even while most squarely in the tariff crosshairs and the one country so far to aggressively retaliate, China has done much, since being a bit shunned post COVID, to invest heavily in AI and may be poised for a resurgence, even in a heavy trade war with the U.S. On the other hand, the new tariffs would deal a big blow to a smaller country like Vietnam, whose exports to the U.S. represent almost 30% of its GDP.
5. Should investors play it safe—or take advantage of new chances?
This period has maximum uncertainty and low visibility, and making short term trading decisions around the fast-changing news seems ill-advised. Also, the losses we’ve recently seen remain paper losses only until stocks are sold, crystalizing that loss. Historically stocks have always recovered from even the most difficult and painful sell-offs, and we’d generally counsel staying invested.
Thayer portfolios are not immune, but they are diversified and have maintained a defensive bias heading into 2025 as noted in prior communication.
We may have reason to add equity exposure on weakness at some point, but we’re inclined to hold for now.
As always, this is a long game, and we will get through this.
Navigating Tariffs, Inflation, and Market Volatility
All clients — the below five questions/answers are from a discussion that was had just before yesterday’s pause announcement. However, we feel it’s still worth sharing. We still face the April 2nd tariffs in 90 days if nothing changes. That said, change has been the rule in recent weeks.
The pause itself is not far off what we wrote in an update to you at the end of last week: following ”the full shock of the (initial) announcement, markets will sort out what it means in reality and whether deals will be made…perhaps some of the most draconian tariffs will be rolled back under political and market pressure…”
As this is written, yesterday’s big gains are about halved today. The pause is welcome, but we still have a 10% blanket tariff and very aggressive volleys back and forth with China, and 100%+ tariffs both ways. The next few weeks will be telling as quarterly earnings season kicks in and we hear corporate guidance based on ground conditions as they are seen for 2025.
As always, please let us know if you have questions or concerns.
David Beckwith, Chief Investment Officer
1. Why is the current administration doing this and how does it fit into their bigger plan?
Frankly, there is uncertainty as to why last week’s tariff program was put forward as designed, and this is what has rattled the financial markets. The president did indeed run (and governed in his first term) with a pro-tariff stance, and in recent weeks frequently teed up reciprocity, noting that we would charge countries what they charge us. But the new tariff rates actually were calculated very differently, using trade deficits as opposed to a country’s tariff rate, resulting in much higher, ungrounded, and arguably irrational rates from our side.
As an example, the European Union charges tariffs of about 2-3%, but because we buy $605 billion while selling only $370 billion, with that $235 billion deficit representing 39% of the $605 billion import total, President Trump took half that 39% to come up with 20% as our reciprocal tariff on the EU. Do this for Vietnam, who sell us a lot of tee shirts and sneakers but buy relatively little from us, and you get 90% halved to a 46% tariff, not reciprocal at all because they actually charge us and others about 5%.
Globally, if the April 2nd tariffs take full effect, we’d be tariffing the rest of the world, essentially all of our partners, at about 23%, while all other countries are in low-mid single digits, effectively walling us off, while also hindering our economy in other ways that we’ll discuss today.
So, the administration must see this as 1) a general expression of pro-American strength and 2) a way to get countries to the table to negotiate and bring greater rationality to any ongoing tariffs. Markets and economies alike need this to be done, skillfully and relatively soon.
2. How might the new tariffs affect prices and the economy?
We’ve already seen uncertainty and unease about the tariff rollout undermine corporate and consumer confidence over the last several weeks, after fairly robust sentiment and economic performance in 2023 and 2024. Recession odds were rising even before the April 2nd announcement.
This arguably took a turn for the worse after April 2nd. The idea of the new tariffs, touted by Trump’s trade advisor Peter Navarro, is to raise some $600 billion a year for the U.S. Treasury, paid by U.S. importing companies, with presumably much of that passed on to U.S. consumers. At 2.2% of our GDP, that $600 billion would effectively represent the largest tax increase in our history, by a factor of two. Some of that is an effective sales tax, with higher prices for cars, phones, clothing, and food, etc., thus pushing inflation up by an estimated 1-2% on top of today’s 2-3%.
Also, the Trump plan may not recognize that 45% of what we import actually are items used by U.S. companies to make things in the U.S., meaning our companies would be shackled by higher costs and thus might export less. Thus it’s no surprise to see a decline in corporate confidence. According to Blackrock’s CEO Larry Fink, his corporate contacts feel we may be close to if not already in some form of recession.
The longer goal may be to bring manufacturing jobs back here, and we know Trump’s views here date back to the 1980s…but we live in a different world economy today, and one the U.S. has thrived in. We’ve been dominant in terms of economic growth and stability, relative stock market returns, creation of leading companies, and capital formation, a world-beating 75% of that capital now housed in the U.S. It already has been a golden age.
As for bringing back jobs, we are already fully employed….and we certainly don’t want to bring tee shirt production here, and maybe not even auto production. We need these potential workers to fill hundreds of thousands of electrician and electrical engineering jobs as we build out AI, making two or three times the auto job.
We’re really a service economy today, with manufacturing workers only 8% of the workforce. If we eliminate all trade deficits, that might go to 9%, hardly a big transformation or victory.
3. What could this mean for interest rates and how might it shake up the markets (beyond what we’ve seen already)?
Again, this depends on whether the April 2nd tariffs in fact take full effect…. but if so, the combination of a walling off and withdrawal from world trade, eroded corporate and consumer confidence, and the $600 billion burden on companies and consumers, could push us into recession and thus bring interest rates down. Again, we expect some form of tariff walk-backs and country by country negotiation, which could head off a significant amount of the corporate and economic pain, but this of course is still TBD.
As for Federal Reserve rate policy, betting odds of multiple rate cuts have risen since April 2nd, but chair Jay Powell is in the proverbial rock/hard place zone. If inflation is moving in the wrong direction, that is higher, he would be reticent to cut rates, even if economic and at some point employment conditions deteriorate. On April 4th he made indications along these lines, pointing to tariff-push inflation as the new wrench in the works.
While the White House might want them, lower interest rates might have to wait for economic backsliding to overtake the tariff inflation effect before coming down. Also, this might not be market friendly if this comes with low or no GDP growth, a less spirted and less well employed consumer, and an erosion of corporate earnings undermining stocks. Facing this possibility, we are in the volatile phase that we positioned portfolios for heading into 2024. At the same time, we are banking on tariff relief from cooler heads, Congress, market forces and perhaps Trump’s plan all along to force concessions. We will see.
4. How are risks changing in international developed and emerging markets?
The tariffs as laid out would act as a dampener worldwide, given the importance of the U.S. in today’s world economy. Even before April 2nd, new alliances and stronger trading relationships outside of the U.S. were being pursued, across Asia (including Japan/Korea/China), Europe, and South America, among other spots. But all countries would be better off if April 2nd proves to be only a starting point, giving way to a more surgical, intelligent, country by country and interregional trade negotiation approach.
We would continue to include non-U.S. stocks, but in an inclusive pan-regional fashion. Picking winning and losing countries is probably foolhardy given the tariff uncertainty.
To take two examples, even while most squarely in the tariff crosshairs and the one country so far to aggressively retaliate, China has done much, since being a bit shunned post COVID, to invest heavily in AI and may be poised for a resurgence, even in a heavy trade war with the U.S. On the other hand, the new tariffs would deal a big blow to a smaller country like Vietnam, whose exports to the U.S. represent almost 30% of its GDP.
5. Should investors play it safe—or take advantage of new chances?
This period has maximum uncertainty and low visibility, and making short term trading decisions around the fast-changing news seems ill-advised. Also, the losses we’ve recently seen remain paper losses only until stocks are sold, crystalizing that loss. Historically stocks have always recovered from even the most difficult and painful sell-offs, and we’d generally counsel staying invested.
Thayer portfolios are not immune, but they are diversified and have maintained a defensive bias heading into 2025 as noted in prior communication.
We may have reason to add equity exposure on weakness at some point, but we’re inclined to hold for now.
As always, this is a long game, and we will get through this.