On April 2nd, President Trump stunned the world, imposing tariffs on dozens of countries that were much harsher than even the harshest predictions, creating a new economic world order and damaging relationships with allies.
We have spent an inordinate amount of time since those announcements reviewing commentary from a wide range of sources to try and better understand their impact.
Suffice to say, it isn’t easy. Opinions on how this will play out varies, but the bottom line is that tariffs are negative; They effectively impose the largest tax increase on American citizens in the history of the United States. There are no winners.
This has caused many economists to comment ‘that President Trump is completely disconnected from reality…..his actions are illogical and absurd’. Even the most respected business minds in the world, in this case, Warren Buffett (who very rarely makes political comments), said tariffs do not work aside from bullying negotiation tactics, they increase inflation, forcing the very people that Trump says he is trying to protect, to spend more money they don’t have on everyday items.
Even the numbers being used by Trump’s team are inaccurate. They didn’t actually calculate tariff rates and non-tariff barriers. They just took the trade deficit with a country and divided it by the country’s exports to the U.S. It isn’t real math, but it’s being used to come up with the tariff rate. It’s insanity.
So, the world, minus one man, remain completely perplexed as we try and figure out the end game of this trade war. The reality is it will probably take a year to know if they worked or didn’t work. What do we do about it?
From a financial planning perspective, be prepared to spend more money on everyday items while these tariffs are in place – i.e. budget accordingly.
From a portfolio perspective, this is perhaps more complicated but, at the same time, perhaps relatively simple too.
Maintain discipline with investment decisions. We have a rational, repeatable process that we follow in all market environments. It works over the long-term.
Maintain global balance in your portfolio – something we have touted for years. The U.S. equity markets are probably the biggest loser in this tariff war, so continuing to invest globally will work on a relative basis.
Maintain a high-quality bias. Volatile markets mean you don’t have to buy small and mid-cap less profitable growth stocks. This is a market where you want to own businesses that have consistent revenue, the ability to pass on some or all of the cost increases to consumers, reasonable or above average dividend yields, and little risk in that dividend being cut.
Be balanced. We always have cash and bonds in our portfolios. While we certainly didn’t predict a trade war, we were prepared months ago for more muted returns and more volatility in 2025. Bonds are doing what they are supposed to do (unlike 2022). They are paying decent cash income, and they are appreciating a little, providing some relief to equities when they decline.
Look to add more uncorrelated assets into the portfolio. We have been actively engaged in this for a little while now and are close to taking action to add a market-neutral and/or solution that includes downside protection through options writing, as a temporary sleeve in our models. This would likely be a placeholder, perhaps in place for months, only to be sold if we see a further selloff in equities that provide a good re-entry point. Or it could remain in place for longer, perhaps for the remainder of President Trump’s presidency, as we expect more uncertainty. After all, his favourite word (according to his own inaugural speech in January) is tariff.
Markets like these are not fun. But I promise you they don’t last forever, and I can also promise you that we will do everything we can to navigate our way through it.
The good news is we know in advance that markets like this happen. It isn’t new. As we wrote on April 1st, the average intra-year correction is 13.6%. The reasons why markets decline are always different, but they usually play out the same way….
Retail investors get complacent when markets rise (2023 and 2024). Markets decline and retail investors panic sell. Markets bottom. Markets recover and investors buy back in after share prices have recovered and ‘the dust has settled’. We will not be doing this.
I want to share some quotes from the second-best money-related book I have ever read (the first being The Psychology of Money). I just finished it this week.
It’s called How Not to Invest by Barry Ritholtz. I have been reading and listening to Barry for years. He has published thousands of articles and podcasts. An excellent communicator, he provides some great perspective on investing.
“Investing is a game of emotions and behaviour rather than one driven by intelligence and data.” Translation – how you act in emotionally charged times is more important than anything.
“Avoiding errors is more important than securing wins.” Translation – avoid the catastrophic 50-80% declines in individual stocks.
“There is an endless torrent of media advice. It's an overwhelming firehouse of speculation. The author of Rich Dad Poor Dad (which sold 32 million copies) has used his immense media following to incorrectly forecast more than a dozen market crashes since becoming popular with this book, potentially causing irreparable economic damage to his readers who took his advice.” Translation – lose the news. The lack of accountability in financial media is detestable. It isn’t helpful in making investment decisions and really only serves to fill the 24/7 news cycle with filler.
Lastly, I have lived through multiple short-term and long-term bear markets:
1998 – markets fell 19% on the Russian currency crisis
2000 – 2003 Tech stock selloff. NASDAQ fell 81%
2007 – 2009 Great Financial Crisis Stocks fell 57%
2000 – 2013, 13 years for a 0% return on the stock market indexes
2018 markets fell 20% when interest rates were hiked
2020 pandemic-induced selloff of 34%
2022 Stocks and bonds both down 10%+ for the first time in 50 years
I have learned that the single biggest factor that determines your success or failure when these events occur, is the way you behave due to how you psychologically contextualize what is happening.
Remember that we had cash set aside for income payments in January, so we are never forced to sell anything we don’t want to in order to create cash to send clients for spending.
We aren’t ‘all in’ on equities. If we were 100% in equities, we would consider lightening up on equities as the odds of a recession have grown. Because we have cash and bonds, it gives us the opportunity to rebalance and protect the downside better than an all-equity portfolio. We won’t disturb the asset mix for accounts that have 10, 20 or 30 years to compound.
We, of course, don’t know how long the tariffs will be in place for, but rather than hope for a return to common sense quickly, we plan for them to be in place for the remainder of Trump’s term.
We also never know when the market bottoms in a cycle – i.e. when is all the bad news priced into stocks? I can tell you this, when that happens, it will not feel good. It will feel terrible. That’s precisely when stocks should be bought, not sold, but we only ever know the bottom is in months later. Thankfully, we don’t manage money in such a black and white, on or off scenario. Rebalancing when our long-term asset mix gets out of whack is a much more predictable, rational, repeatable and effective strategy.
This is a very fluid situation. We will continue to monitor this very closely for you, and we will continue to communicate as needed. Thank you.
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