Q1 Newsletter - 2025
TARIFF Update & Chartstorm
Just a couple of weeks into his second term, the president is picking up right where he left off by imposing new tariffs as he seeks to push his policy agenda forward. Our only goal here is to help everyone better understand tariffs and their potential impact, clear up some misconceptions, and discuss how we might respond as long-term investors.
Let’s start with what has transpired over the last couple of weeks.
What Happened?
Within days of taking office, Trump announced tariffs on imported goods to the tune of 25% on Canada and Mexico, and 10% on China[2]. Given that 43% of US imports come from these three countries[3], these are significant tariffs.
However, within hours of the initial announcement, the tariffs on Mexico and Canada were placed on a month-long pause[4], supposedly due to the swift action by those two countries in response. What will happen once this pause expires is anybody’s guess. As an FYI, tariff specifics are changing by the day, so there are many possible ways this may play out. For now, though, let’s move on to misconceptions.
What is a Tariff, and Who Pays It?
At its core, a tariff is nothing more than a tax on imported goods, which could be raw materials, luxury finished goods, or anything in between.
Perhaps the biggest misconception is regarding who pays this tax. Contrary to what many people believe, the foreign country does not pay the tax. It is the importer who pays the tax[5], which means American corporations bear the burden of the tariffs, at least initially.
Just because the foreign country isn’t directly responsible for the tax doesn’t mean that they are indifferent to tariffs because they aren’t, as the increased cost of importation could weaken consumer demand for their goods. Additionally, prolonged tariffs could encourage manufacturers to relocate their operations to other non-tariffed countries.
What Are the Potential Financial Repercussions of Tariffs?
To be very clear, the global economy is incredibly complex, so it’d be foolish to think that anyone knows what impact these tariffs will ultimately have. That said, from a purely economic standpoint, we can draw some basic conclusions about how tariffs could impact corporations and the economy if they aren’t eliminated.
As already discussed, tariffs are a tax paid by U.S. corporations. This being the case, corporations have just two options to choose from to deal with these additional costs:
- Companies can absorb these taxes, which would probably reduce earnings (bad for investors).
- Or, companies could pass this tax along to consumers in the form of higher prices (bad for consumers)[6].
Obviously, neither scenario is particularly great. That’s not to say that tariffs serve no positive purpose if used as an effective negotiation tool, but experts seem to agree that there are rarely any winners in a prolonged trade war[7,8].
So, How Should We Think About Tariffs as Long-Term Investors?
The biggest impact for investors is likely to be increased uncertainty and volatility. While Trump has indicated that he is okay with some pain[9], he’s been pretty clear through the years that he considers the stock market's performance to be one way he measures the success of his policies[10]. Keeping this in mind, he could walk these policies back if there is “too much” pain for his liking. Though, only Trump knows where that line is.
Zooming out to a more long-term perspective, I’d argue that tariffs are likely to be viewed similarly to every past worrisome headline in that everyone will have forgotten about them in just a few years’ time.
In other words, we won’t pretend to know what the future holds, but history has shown that every previous bout of volatility—regardless of the catalyst (tariffs or otherwise)—would have been rightly viewed as an opportunity to buy more shares of the world’s great companies at temporarily lower prices. Not surprisingly, I encourage you to view any volatility that comes from this in exactly that way.
[1] Politics rarely (if ever) mixes well with successful investing, so I think it’s best to remain neutral in this regard.
[2] David Bahnsen; If these broad sweeping tariffs are ultimately enforced similarly to those of his first term, there will be countless exclusions, which would be a significant reduction in the ultimate tariff taxes “earned.”
[3] Apollo
[4] The tariffs with China remain in place.
[5] CNBC
[6] Cato: “More than a dozen academic studies found that U.S. consumers bore nearly the entire brunt of tariffs imposed during Trump’s first term.”
[7] GMO: There are few winners in a trade war, least of all, consumers. See also [6] again.
[8] BBC: China has already announced retaliatory tariffs of their own.
[9] AP News
[10] ABC News
CHARTSTORM
This month, we also have a few great charts to share on a wide range of topics, including the general financial health of consumers, the economy, inflation, and the markets.
WE hope you find these notes offer valuable perspective as we work together toward your financial goals and objective.
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MONEY MARKET FUNDS ECLIPSE $7 TRILLION FOR THE FIRST TIME: It was just over a year ago that money-market funds passed the $6 trillion mark for the first time, and now they’ve passed $7 trillion. Remarkably, as you can see in the chart below, money market assets have nearly doubled since the start of 2020. Not bad for a time in which so many people have complained about how terrible everything has been. (Source: Sandbox Daily)
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CONSUMER DEBT IS GROWING, BUT THAT’S ONLY HALF THE STORY, 1 OF 2: Not too long ago, consumer credit card debt topped $1 trillion for the first time and has since eclipsed $1.1 trillion. So, we already know that the media will sound the gong of worry for every $100 billion that is added (they love round numbers), but, of course, this tells only half the story. As we look at total household debt when compared to total assets, U.S. consumers are in a better position today than at any point over the last 50 years! As incredible as this is, I have yet to hear the media mention this fact. (Sources: Chart: Apollo; Credit Card Debt: CNBC)
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CONSUMER DEBT IS GROWING, BUT THAT’S ONLY HALF THE STORY, 2 OF 2: While asset growth has outpaced debt growth by a considerable amount since the Great Financial Crisis, (as shown above), we’ve also seen credit card debt decline as a share of disposable income. With higher asset prices, increased cash holdings, and higher levels of disposable income, it seems that consumers are in great shape to weather most economic storms that might be on the horizon. (Source: Apollo)
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WAGES CONTINUE TO OUTPACE INFLATION: Despite inflation ticking up again (we’ll get to that in a moment), wages continue to rise faster than inflation and have done so every month for the last 20 months. Certainly, these rising wages are helping to fuel additional disposable income and keeping debt payments in check, as previously noted. We can only hope that this trend continues throughout 2025. (Source: Charlie Bilello)
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THE DEATH OF THE DOLLAR HAS BEEN TEMPORARILY POSTPONED (AGAIN): You may recall that in the middle of 2023 (which feels like a decade ago), there was a broadening concern about de-dollarization and the general decline of the dollar. Based on the media’s sentiment at that time, it felt like the dollar was surely doomed. Well, over the last few months, the dollar has been on a tear (when compared to a basket of six other world currencies), routinely making new highs. While nobody can definitively say why this is the case, we can likely tie the dollar’s performance to our comparatively strong economic and productivity growth, equity performance, and higher yields. Perhaps not surprisingly, the conversation is now shifting to whether the dollar is currently overvalued and destined for a collapse. It’s as they say, the more things change, the more they stay the same. (Sources: Chart & Recent Performance: St. Louis Fed; 2023 Concerns: Schwab)
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IT’S NOT ALL ROSES…MORTGAGE RATES ARE (ODDLY) RISING: Perhaps the most perplexing recent phenomenon has been that the average 30-year mortgage rate has increased by a full percentage point even as the Fed has cut rates by that same amount. There are a lot of factors that go into mortgage rates, but this one has many people scratching their heads. What appears to be happening is that our robust economy is increasing the fear that inflation may spike again, which has caused the Fed to alter its future rate outlook. This change in outlook seems to have caused a jump in 10-year Treasury yields, which influences mortgage rates. I guess you could say, “It’s complicated.” One thing we know for sure is that the housing market could use a reprieve. (Sources: Rates & Chart: Freddie Mac; Fed Outlook: Federal Reserve; 10-Year Treasury Yield: St. Louis Fed)
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IS INFLATION STILL A PROBLEM?: Part of the reason for the Fed’s cautious approach to rate cuts is the apparent stickiness of inflation. As you can see in the chart below, inflation has started to creep up a bit. Though, we should note that this would be the third time inflation has done exactly that since it peaked almost three years ago, with the first two instances not amounting to much. So, I guess the answer to our question above is maybe, but maybe not. We can’t say for sure because inflation is a moving target, which is why Fed leaders have been nimble in their approach. While the ripple effects of fighting inflation are not fun (what’s happening with mortgage rates is one example), it would serve us well to remember that these effects are all preferred to rapidly increasing prices. (Source: Charlie Bilello)
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VOLATILITY DOESN’T (NECESSARILY) MEAN POOR RETURNS: Imagine a five-year period where we experienced successive market drawdowns in the following amounts: -34%, -5%, -25%, -10%, and -9%. In this hypothetical five-year period, would you guess that the market had a positive or negative return? As I am sure you’ve figured out, this example represents the last five years in the market. And as I’m sure you know, not only were returns not negative, but they averaged an incredible +14% per year, with dividends reinvested. That means that, despite all that negative volatility, $1 invested at the start of 2020 (ignoring costs and taxes) would be worth about $2 today. I hope you’ll keep this point in mind whenever volatility returns in the future. I suggest that it probably won’t be the end of the world next time either. (Sources: Chart: A Wealth of Common Sense; Average Annual Return: Political Calculations [2020.01-2024.12])
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It’s indisputable that there are some concerns starting to brew, but let’s be honest: Isn’t there always something to worry about?!
Despite all the headwinds we’ve encountered so far this decade (and continue to experience), the market, the economy, and the American consumer have thrived to the surprise of nearly everyone—including the Fed, economists, doomsayers, and pundits alike.
To be clear, these last five years may tell us little about the future, but they have shown how incredibly resilient our markets and economy are, which is something we should all find encouraging as we look toward the future.
We hope you’ve found this note to be helpful in that effort. As always, please be encouraged to reply or call with any questions, and most importantly, stay the course.
STP Raymond James
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Disclosures:
Investing involves risk, and investors may incur a profit or a loss. All expressions of opinion reflect the judgment of the authors and are subject to change. There is no assurance the trends mentioned will continue or that the forecasts discussed will be realized. Past performance may not be indicative of future results. This material is being provided for informational purposes only and is not a complete description, nor is it a recommendation. The indexes mentioned are unmanaged and cannot be invested into directly. No investment strategy can guarantee your objectives will be met. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment decision. Material is provided by Money Visuals LLC, an independent 3rd party, not affiliated with Raymond James.