Decoding the Tariff Announcement
“As history has repeatedly proven, one trade tariff begets another, then another - until you’ve got a full-blown trade war. No one ever wins, and consumers always get screwed.”
As you can imagine, this has been a hectic week for the financial industry. Clients have called, emailed or met with me to share their concerns about what has been going on in the stock market and their portfolios. And rightfully so!
I wanted to share with you what occurred, what I think is actually happening and how to best position your portfolio moving forward.
Now before we go any further, I want to make sure I point out that this is not meant to be a political rant. No matter what you think of the current administration, my hope is to try and be neutral and share my observations based on what I have witnessed as a financial professional navigating the markets and managing money for almost 30 years.
On Wednesday, April 2, 2025, President Trump announced a new tariff structure, hailing the day as "Liberation Day" and "one of the most important days in American history." The new tariffs included a baseline 10% tariff on imports from all countries except Canada and Mexico, and additional country-specific "reciprocal" tariffs on approximately 60 countries. The baseline tariff was set to begin on April 5, 2025, while the country-specific tariffs would commence on April 9, 2025.
Shortly after the announcement, the Markets started to decline rapidly in after hours trading. Most economists were not expecting reciprocal tariffs that high and were a bit baffled by the math on how these “Tariffs Charged to the U.S.A.” were calculated. The numbers look more like trade deficits, not necessarily tariffs that these countries are charging on US goods they import. Thus making the “reciprocal” component of the plan, invalid in my opinion.
So what tariffs do countries actually impose on the US? Based on a Cato Institute report, trade-weighted average tariff rates in most countries are much lower than what the Trump administration shared. The report is from the World Trade Organization which reflects the trade-weighted average duty rates in 2023, the most recent year available. You can see here how the White House's calculations are much higher than the World Trade Organization averages.
WTO rates include agricultural and non-agricultural products as of 2023. Source: The White House, the World Trade Organization and CNBC.
One of the things I took away from the announcement was that these numbers were not necessarily tariffs that would be applied, but more as a starting point for negotiations with each individual country. More on this later.
As traders and investors digested the information overnight and realized that the chances of a recession possibly increased, they started to sell equities and pour into safer assets on Thursday. After witnessing the reaction to global markets, Trump contradicted his White House aides, saying he was open to negotiations. When all was said and done, the S&P 500 ended up declining by 4.84% by the end of the market close.
The next day, China announced retaliatory tariffs of 34% on all goods from America, causing the US Markets to open lower. Trump promoted a better-than-expected March jobs report as evidence of the success of his plan later that Friday morning.
“GREAT JOB NUMBERS, FAR BETTER THAN EXPECTED. IT’S ALREADY WORKING. HANG TOUGH, WE CAN’T LOSE!!!” he wrote on Truth Social.
It’s important to keep in mind that the latest nonfarm payrolls report from the Bureau of Labor Statistics covers the month ending mid-March — before the recent tariff announcements.
Hours later, the head of Vietnam's ruling Communist Party spoke to the US President about the possibility of eliminating the recently imposed, strict US tariffs on imports from Vietnam. Trump announced the potential negotiation on social media, stating that the tariffs could be reduced to "zero" if a deal is reached.
Later that day, Trump said that Federal Reserve Chair Jerome Powell should cut interest rates and “Stop playing politics.” During an event where Powell spoke, he said he expected Trump’s tariffs to raise inflation and lower growth, creating a “highly uncertain outlook.” However, Powell indicated that the central bank won’t move on interest rates until it gets a clearer picture on the ultimate impacts of these tariffs.
This “exchange” between Trump and Powell gave investors even less assurance and the selloff continued. By the close of the markets, the Dow had dropped by over 2,200 points and the S&P 500 was down 5.97% for the day.
Jeremy Siegel, professor emeritus of finance at University of Pennsylvania’s Wharton School of Business and Wisdom Tree chief economist, is someone who I admire and has usually had a great perspective on the economy and markets. In a CNBC interview, Siegel said these tariffs are the biggest policy mistake in 95 years!
Why am I going into so much detail about what was said by Trump and others? Because I think it is important to know what is going on so you can form your own opinion. Especially after I realized that many people are under the impression that Trump is trying to tank the economy on purpose, so he can force the Fed’s hand and get lower interest rates.
That might be an interesting theory, but there is a big problem with it. If Trump’s plan to impose tariffs is to get lower rates, then he might be in for a surprise when the Fed has to raise rates to combat the inflation that is caused by these tariffs. Powell wants to be very careful to not lower rates, only to turn around and raise them back up.
The other problem with this theory is that Trump is boasting about the jobs numbers and how the economy is already starting to pick up. Why would he want higher job numbers, if he wants to crash the economy? Also, if the economy starts to heat up, the Fed usually will raise rates to cool it back down. Again, the opposite of what Trump is asking for, when it comes to interest rates.
Lastly, Trump has constantly bragged about the billions of dollars in revenue that the tariffs will bring to the US. But there is a flaw in that theory as well. If I was a country and you were going to slap me with a huge tariff, I am less likely to trade with you. And when I don’t export any of my goods, there are no tariffs to be charged. Thus, no money being collected by the US.
So where does that leave us? If you’re confused by all of Trump's contradictory comments, join the club! None of it makes sense economically. Which brings me to what I believe is truly going on.
I want to be clear, I don’t have a magical crystal ball, but based on what I have witnessed from this administration in the past, I am pretty comfortable with sharing my thoughts and opinions with you.
I don’t think Trump is trying to crash the markets. Remember how he used that as a barometer of how he was doing in his first term? He would love to get rates lower, so he can show that as a win for the American people. But tariffs are not the answer. I believe he is using tariffs as a way to get all these countries to come and negotiate with him. If Thailand, for example, comes to the table and lowers the tariff rate from 32% to 10%, Trump will still take it as a win.
In the last month we have witnessed him flipflop with the tariffs he wanted to impose on Canada and Mexico. They were on, then off, then on, etc. Many of his billionaire friends that own/run major global companies can’t be happy either. They have collectively lost billions of dollars in net worth and still don’t know if they should take these tariffs seriously.
My best guess is that in a month or so, there will be so much pressure on Trump, that he will cave and spin whatever small tariffs that he has negotiated as a win for the American people. He will probably brag about how much money was made by the US and all the jobs that were created in a short period, then remove or drastically reduce the tariffs from what he initially proposed a few days ago.
Again, this is just my best guess of what I think might happen. If I am right, we could hopefully see the markets be restored and back to the levels they were at before “Liberation Day” was ever announced. If that’s the case, when you zoom out, this will just be a small blip in the big picture of your investing journey.
Source: Clearnomics, Standard & Poor’s, Principal Asset Management. Data as of April 3, 2025.
Action Items
So what does one do with their portfolio in the meantime? Here are some of the things you should be considering and some of the moves we are making for our own clients.
1. To start, it’s very important to ensure your existing portfolio matches your risk tolerance levels. If your portfolio has grown over the years and is now more aggressive than you are comfortable with, then it might make sense to rebalance. But if your allocation has more volatile swings than you can stomach, you might not be in the right portfolio for you. At Lake Avenue Financial, we utilize a simple Investor Questionnaire that helps you understand your risk tolerance and match you to the appropriate portfolio. Feel free to utilize it and see where you should be.
2. You should have a long term timeframe for money invested in the stock market. Keep in mind that the market experiences several substantial pullbacks each year. The U.S. stock market typically sees an average decline of -13.5%. Despite this volatility, most years end with positive returns, averaging 9%. This demonstrates that investors are often rewarded for remaining disciplined during short-term fluctuations. Trying to “time the market” by panic selling and missing the best days can cost you in the long run!
This chart shows the value of an initial investment of $1000 using S&P 500 price returns before transaction costs under varying scenarios. Each scenario assumes $1000 was invested 25 years ago and remained fully invested or was moved to cash during the best market days. Date range: 25 years ago, to present. Source: Clearnomics, Standard & Poor’s, Principal Asset Management. Data as of April 3, 2025.
3. Having ample cash for emergencies or possible buying opportunities is always recommended. When building out your financial plan, it is key to have your foundation in place and make sure you are not having to dig into your investments in an inopportune time. Such as when the markets sell off. Having a 3 to 6 month cash reserve earning interest safely will help ease your mind when things get volatile.
4. I can’t stress how vital it is to be diversified. Your portfolio shouldn’t only consist of US companies. Owning a broad range of companies in developed regions as Europe, Australia, Asia, and the Far East as well as having exposure to Emerging markets has helped our portfolios and can possibly help yours. Based on the recent events, we will be adding more exposure to countries outside of the US. My thoughts are that these tariffs could backfire on the US and cause Isolationism. Where other countries or regions will avoid trading with the US and just trade with other partners. We can see the European Union just trade with each other and try to avoid US products altogether.
Source: Clearnomics, Bloomberg, Principal Asset Management. Data as of April 3, 2025. All sectors are represented by the Bloomberg Barclays bond indices except for Preferreds, EMD USD and Local which are the S&P Preferred Stock Index, JP Morgan EMBIG Diversified Index and JPMorgan GBI-EM Core Index, respectively. The Balanced Portfolio is a hypothetical 60/40 portfolio consisting of 40% U.S. Large Cap, 5% Small Cap, 10% International Developed Equities, 5% Emerging Market Equities, 35% U.S. Bonds, and 5% Commodities.
5. As part of your overall portfolio, consider owning bonds that can help mitigate risk. If, ultimately, interest rates actually come down, then bond prices should rise. Most of our clients have exposure to bonds and they have been a great way to reduce portfolio volatility.
6. Lastly, consider commodities and other alternative investments in your portfolio. We have seen the price of gold and other commodities rise in recent years. Having a small percentage of exposure in your overall portfolio can act as a hedge against inflation.
As always, if you have any questions or concerns and want to discuss your own portfolio, feel free to reach out and we can schedule a time to chat.
~Alex
Whenever you’re ready, there are 3 ways I can help you!
Organize Your Money Course: Are you ready to take control of your financial future, instead of letting it control you? This course will help relieve your financial anxiety and get you back on track.
Book a 1-on-1 Meeting: Whether you’re looking for assistance with your financial planning needs or are in the financial industry and you want to learn how to grow your practice, I can help.
Lake Avenue Financial: If you’re looking to build a relationship with a team who can help simplify, educate, relive the stress caused by money decisions and make sure you are on your way to financial independence, we are here to help!
Be Inspired to take Action
Join over 7,000 readers of the Inspire Action newsletter for tips, uplifting stories and actionable steps to guide you through your financial journey.