Tariffs…Some Thoughts to Consider
“You keep using that word. I do not think it means what you think it means.”
My favorite movie is “The Princess Bride.” The quote above is from the scene where Vizzini uses the word “Inconceivable” one too many times with Inigo Montoya and Fezzik on what is ironically the “Cliffs of Insanity.” As I am writing this, S&P 500 futures are indicated down another 5% and it feels like we are “on location.”
The Issue: “Reciprocal” Tariffs
While there are multiple definitions for the word “reciprocal” it can mean “operating for both, especially or equally to a similar degree”; or it can be the inverse/opposite…usually it is used to describe something that is similar on both sides.
Source: whitehouse.gov
What has caught investors off-guard is how the tariffs were calculated. The calculation is on 2024 good-trade deficit with a country, divided by the amount the US imported from that country. That result was then divided by 2, which is the “Discounted Reciprocal Tariff.”
So, taking China for example, our trade deficit with them in 2024 was approximately $295b, which divided by the amount the US imported from there, which is 67%. Then, divide that by 2, and you get the 34% the administration calculates as the reciprocal tariff. This will then be on top of the earlier tariffs on China that were announced.
If that does not really make sense as to how it was derived, not to worry, you are not alone.
Recent events...
This is one of the worst two-day selloffs in the past 75 years, with the others being the crash in 1987, the selloff in 2008 during the Great Financial Crisis, and during COVID.
Source: Bloomberg
…while the various indices and style buckets based off Morningstar from the highs and year-to-date are as follows:
Things to consider…
Diversification. Unlike 2022 where bonds declined because of increasing yields, bond yields have declined which has served as an offset to the weakness in equities year to date. Additionally, exposure to non-correlated investments is potentially a good option.
Liquidity. The timing of cash withdrawals and what is being sold to fund those withdrawals is important to consider.
Interest Rates. Part of the thought is that the President would like the Fed to cut rates to reduce the amount of interest we are paying on debt. The Fed being able to cut rates has long been a “put” in our overall thesis of sharp market declines not being sustainable for a long period of time. The one caveat to this now is that, if the tariffs are in fact inflationary, it will pose a challenge for the Fed to cut rates aggressively.
In Summary…
While a fix (recovery) is unlikely to happen as quickly as this damage was done, within 24 hours of the tariff announcement and the market selling off, Vietnam and Cambodia were very quickly negotiating a way to resolve this. It is always difficult to time markets, but after crises, the market has eventually recovered, often aided by a low interest rate environment and usually with focus on industries or sectors that have long term sustainable growth drivers.
One of my other favorite movies is “My Best Friend’s Wedding” and the quote from that movie that always resonates with me is “this too shall pass.”
DISCLOSURES
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