Yesterday’s tariff announcement fell under our “worse than-feared” scenario as President Trump announced a 10% baseline tariff for virtually all imports and dramatically higher tariffs for major trading partners, including China and the EU, which saw the imposition of 34% and 20% tariffs, respectively. From a market standpoint, the reaction was as expected as global markets and futures fell sharply, as did the U.S. Dollar (at multimonth lows) while Treasury yields are also declining to fresh lows (a growth warning signal).
From a positioning standpoint, the tariff announcements are worse than feared but at this point I do not believe they are a bearish gamechanger. I say that for two reasons: First, the administration implied that these tariffs are a ceiling and they are open to negotiation for global tariff reduction, so it remains a possibility in the coming months global tariffs are reduced. Second, there were important exemptions including all USMCA compliant goods, chips from Taiwan and drugs (pharmaceuticals) from Europe. Those are major import categories and will help to soften the blow from these tariffs. That said, clearly this is an incremental negative for markets and I do not expect the recent lows to hold in the S&P 500. Bottom line, while the tariff announcement wasn’t a worst-case scenario (that would have happened if there was no hope of global tariff reduction), it was an incremental negative and we should expect more market volatility in the near term (although I would not take this as a signal to materially de-risk from stocks, at least not yet).
Now to the 5 Keys to the markets this year:
The first 4 keys:
1. The US business cycle appears to be aging in reverse.
2. The Industrial Renaissance is fueling a new era of growth
3. AI megatrend could boost stocks for years
4. Drug discovery is creating a golden age of healthcare
5. There are always reasons not to invest
Imagine going back in time to New Year’s Day 2020 and learning in advance about the biggest events over the next five years. The COVID-19 pandemic. A steep bear market. Inflation above 9%. Wars in Ukraine and the Middle East. A trade war with China. Political uncertainty in the U.S. With that knowledge, would you want to invest in stocks? Probably not.
“In my 25 years in the mutual fund business, I have never known a good time to invest. There are always a dozen reasons why it makes sense to wait. We have a new president, strife in the Middle East, excessive government regulation, oppressive tax rates, and a Congress that is more part of the problem than the solution,” said former Capital Group executive Graham Holloway.
Although that may sound like a reflection of the current environment, Holloway’s quote is from 1981.
The point is there are always reasons not to invest, and that’s no different today than it was in 2020 or 1981. But markets have been resilient over time. And investors have typically been rewarded for overlooking near-term uncertainty and keeping focus on their long-term investment goals.
So, going back to New Year’s 2020, what would have happened if you ignored all the troubling events on the horizon and stayed invested? Since then, the S&P 500 Index has risen more than 100%.
My point in the 5 keys is that there is a lot to get excited about in the markets despite the near-term fears and uncertainty. The investors that win are those that stay invested in a Secular Bull Market. Stay invested, stay positive, stay calm.
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