Where Do We Stand with Tariffs and How Important Are They for Markets?
Last week, the situation around tariffs was turned upside down as the Court of International Trade blocked most of the administration’s 2025 tariffs, declaring that the law used to justify them, the International Emergency Economic Powers Act (IEEPA), doesn’t give the president the authority to levy tariffs. But less than 24 hours later, the U.S. Court of Appeals for the Federal District put a hold on the earlier judgement, while the appeals process occurs, so the tariffs remain in effect until a final decision is reached (likely in the next few weeks and probably by the Supreme Court).
From a market standpoint, this seems bullish. After all, most analysts agree that if it weren’t for the tariffs, stocks would likely be near all-time highs. However, this tariff decision isn’t meaningfully bullish and it really doesn’t change the outlook for stocks (which I think is still positive in the longer term, but much more uncertain near term).
Above all else, markets (and economies) need clarity to operate. The fewer tariffs the better for economic growth and earnings, so the tariffs are a headwind on both, the only question is how much of a headwind. Over the past few weeks, investors and business were in the process of accepting that would likely be 10% global tariffs with some higher tariffs in select sectors (steel, Chinese imports, etc.) And the general consensus was that it wasn’t that bad and business and the economy could learn to adjust and not see a meaningful impact.
While the court decision increases the chances that the economy and businesses will get temporary tariff relief, it also reignites uncertainty and that is a problem. Put simply, uncertainty breeds caution and too much caution will create an economic slowdown. No one expects that tariffs will simply go away if the courts rule against the administration. Instead, what likely will occur will be a game of policy whack-a-mole where the administration uses another trade-related law to justify the tariffs, only to be sued for that, leaving businesses and consumers constantly waiting for the next verdict, followed by the expected shift in tactic to again try and apply tariffs.
So, get used to hearing about Section 122 and Section 301 tariffs, which the administration will likely tack to if the IEEPA tariffs are ruled invalid. In an absolute sense, the court’s decision this week is positive for economic growth because it removes a worst-case tariff scenario. But it is not a materially clear positive at this point because it has likely just created a domino effect where the administration will utilize other laws to justify the tariffs (it’s important to remember that the administration believes these tariffs are the correct policy for the country and they are not going to give up easily).
Again, that’s not a negative by itself, but after businesses and consumers finally believe they may have some clarity of trade terms, we’re now subjected to (likely) months of policy uncertainty and that’s, at best, a modest headwind on growth and earnings. Bottom line, my cautious outlook on this market remains in place. While tariff noise will dominate the headlines, I think the area of focus needs to be the economy.
This is an important week for data and if that data confirms the “hints” of weakness we saw last week, then it won’t matter what’s happening with tariffs. Slowdown fears will rise and stocks will drop because this market isn’t even close to pricing in a real economic slowdown (it could drop 5% and it still wouldn’t be very close).
Because of this belief, I continue to feel most comfortable staying long (again I think the outlook beyond the next few months remains constructive) but doing so with 50% in value and fixed income. I continue to think, given this environment and the risks we’re facing, that’s the best way to stay long (again the economy and corporate earnings deserve the benefit of the doubt), but not take on too much volatility or risk because if this economy starts to roll over, a 10% decline in the S&P 500 can happen in a hurry (and keep going).
This has caused our portfolios to underperform in the past month, but caution is the best decision given the current economic environment. I suspect we will need to wait on earnings reports in July to decide when to move more aggressive.