Market Commentary

Tariffs: Reactions and Repercussions

By Rob Sigler, MBA

April 4, 2025

Our immediate reaction to President Trump’s “Liberation Day” tariffs is that they unfortunately met our expectations.  We fully expected that tariffs would exceed consensus in terms of scope and magnitude.  For the poker players in our audience, Trump’s negotiating style has always been the functional equivalent of “all-in.”  Said differently, he leads with the most aggressive stance possible in an attempt to get others to fold.  We think it is the wrong strategy and here is why.  Let’s start with a controversial statement first.  Trade deficits aren’t inherently bad.  Think about it.  Almost every single individual runs countless trade deficits with hundreds of vendors.  For example, I run a trade deficit with my barber.  I pay him for my monthly haircut.  He doesn’t pay me.  Can I cut my own hair?  The answer is probably yes, however, I know he can do it considerably better, and the time and education it would take for me to become proficient in cutting my own hair is not worth the effort to me.  The same phenomenon happens countless times per day.  I run a trade deficit with the supermarket, the gas station, Costco, etc.  You get the point.  Trade deficits are only bad if you think that you are being taken advantage of in the commercial equation.  For that reason, we have welcomed Trump’s efforts to gain reciprocity from our trading partners, but this action seems to go further.

With a 10% across the board tariff with all countries, and unique, additional reciprocal tariffs with another 60 nations, the weighted average tariff will rise from 3% presently to something amounting 18.2% according to Goldman Sachs.  As you can see from the illustration below, that figure topped Goldman’s risk scenario, but more importantly, it puts us back to levels that we saw post the Smoot-Hawley Tariff Act of 1930.  That protectionist era was associated with some of the most austere economic times in the United States’ history.  While we don’t expect anything like that episode, we have to accept the obvious.  This set of tariffs has essentially ushered in an enormous tax increase on the U.S. consumer.

What will happen next?  Will this evolve into a broad trade war or will it cause negotiation, and ultimately greater reciprocity with our trading partners?  Our sense is that countries like Canada and Mexico that are extremely dependent upon the United States will ultimately offer concessions.  Many of the Southeast Asia countries who are similarly ill-equipped to economically fight will similarly seek negotiation.  That said, we fully expect China and the European Union to retaliate.  Will Trump’s executive orders be challenged in Congress or in the court system?  That seems quite likely.  Tariff matters are typically negotiated by the Executive branch, but legislated by Congress.  Trump used a 1977 law called the International Emergency Economic Powers Act (IEEPA) as the basis to give him the executive power to regulate international commerce.  In effect, he proclaimed a national emergency, declaring that the United States was facing an unusual and extraordinary external threat.  IEEPA has not been used in this manner before and it will certainly be tested.  Will Congress usher in salves to this tax on consumption by lowering taxes elsewhere or offering fiscal stimulus to offset?  To a limited extent, that seems likely.  Will this ultimately force the hand of the Federal Reserve to lower interest rates if economic conditions erode?  Initially we believe the Fed will focus on the price and inflationary impacts of tariffs.  However, if the economy slows as we expect, they will be forced into aggressive action.  Bottom line, the reaction function to the actions taken today by Trump is extremely hard to calculate.  It is going to take time to determine the end result.

Until then, we intend to focus on the things that we do know.  Policy uncertainty has already caused consumer and business confidence to fall.

This will no doubt make things worse.  When faced with higher prices, consumers will react the way that economic laws predict.  In other words, consumers will buy less, trade down, or attempt to substitute for similar, less costly goods.  This will cause consumer demand to fall.  Corporations will react to this behavior by cutting expenses, namely headcount.  It’s very likely that the economy will stall even further.  Will this lead to recession?  It’s hard to handicap at this point, but clearly, the odds have risen substantially.  Goldman Sachs just raised their probability to 35% as an example.

What should we be doing?  The knee-jerk reaction would be to sell equities and go to cash.  That said, as we published last week, if we avoid recession, history tells us that, on average, the bulk of the damage has been done.  If we do enter recession, we have a longer path towards recovery and probably some more volatility ahead, but it is manageable.

We continue to believe the answer to uncertainty is 1.) adequate diversification in your portfolio construction to weather storms, and just as importantly, 2.) staying the course.  At Westshore, we have been engaged in that discipline for some time.  In equities, we have included value stocks, cash flow compounders, and broad international and emerging equity exposure.  That is being validated today by significant outperformance versus the broad S&P 500.  Additionally, the fixed income piece of our allocation is providing ballast when it is needed most, up sharply in the face of equity volatility.  Finally, uncorrelated alternatives like private infrastructure, private equity, asset backed securities, triple net real estate, and distressed debt are proving resilient in the face of adversity.  We will continue to lean into these categories to insulate portfolios against economic risk.

On the second point, staying the course is equally important.  We firmly believe in time in the market, as opposed to timing the market.  When investors get fearful, they often withdraw from the market and place their money in cash.  The difficulty in timing the market, however, is that the all-clear, redeployment signal is not a ringing bell.  The signal is often indiscernible to investors. In fact, the time of maximum opportunity is often the bleakest moment.  Why is that important?  Missing the 10 best days of the past twenty years would halve your equity portfolio returns over the last 20 years.  Unfortunately, the most powerful days tend to arrive in close succession to some of the worst down days experienced.  Thus, if you bail out during the misery, you often miss the joy that follows.

Bottom line, while we don’t agree with the protectionist policies that the nation has embarked upon, we don’t believe it is time to panic.  We believe this episode will pass just like all economic challenges do.  We have built our portfolios to withstand the challenge.  We are happy to answer any questions that you may have.

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