New Trump Tariffs and the Stock Market

0:00 Welcome to Something More with Chris Boyd. Chris Boyd is a Certified Financial Planner Practitioner and Senior Vice President and Financial Advisor at Wealth Enhancement Group, one of the nation's largest registered investment advisors. We call it Something More because we'd like to talk not only about those important dollar and cents issues, but also the quality of life issues that make the money matters matter. Here he is, your fulfillment facilitator, your partner in prosperity, advising clients on Cape Cod and across the country. Here's your host, Jay Christopher Boyd. Welcome to the program, Something More with Chris Boyd. I'm Chris Boyd here with Jeff Perry and Russ Ball, part of our team here at the AMR team of Wealth Enhancement Group.

0:44 And we're glad to have you listening and hope you'll join us each week as we discuss all kinds of things relevant to your personal finance, your financial planning and portfolio management. Today, got to talk about tariffs. Yesterday, the president had a Rose Garden press conference release of his long awaited tariff plan. Liberation Day. Liberation Day, as it was dubbed. And the idea of trying to look at where we're being tariffed on our imports and have an effort to get a more fair reflection, I think is the way they would certainly classify that.

1:30 So we're going to talk about that and we're all going to have things to say about it. Tariffs have the virtue of trying to level the playing field for the domestic country's companies. Yeah. But at the same time, it is something that is levied against the consumer or the buyer of goods, whether it's the manufacturer buying, importing supplies for the product they look to make or finished goods that come into the United States, the consumer would be paying that tax, the tariff.

2:11 Indirectly. Directly, right? I mean, it's charged to the company, the importer, but someone's got to pay that and it's going to end up going to the consumer. Indirectly, I suppose. But it's ultimately... Well, the manufacturer could reduce the price to be more competitive. The retailer could reduce the price to be more competitive. But yeah, it's an increased cost of the product. How much gets passed along to the consumer? Most. Most, usually. But that's why I use the word indirect. So ultimately, an increase in the tax that is essentially going to, in that effort to try to make a domestic product more competitive.

2:59 Historically, I think that's been the view that this is not an ideal way to do things because it doesn't always make the domestic product better or more competitive. That being said, there are inequities, government subsidies in other countries. There's all kinds of considerations that go into this. We certainly have a deficit each year on our budget. I get the clear impression that the president thinks this is part of the answer. Managing that annual deficit by having more come into the government by way of these tariffs. Additionally, I think there's a sense of fairness that this administration is pointing to saying, hey, look at all these.

3:46 There's a great chart that they shared yesterday that really depicts the discrepancy and the inequity of tariff treatments on goods going into other countries from what we're charging from those countries. I think some of that has been historically, in part, for some of these smaller economies that we're willing to give them more flexibility in their development of their economy. That's what's under review. That's going to change. It sounds like there's been some multiple aspects of this.

4:27 I heard former Secretary Gutierrez on one of the financial shows yesterday broke it down in some good ways. He talked about the 10% tariff base as something that's probably just always expected to stay. He put China in its own category. Let's talk about that separately. I think that is probably- I think that's right. I forget all of the things he said, but largely the rest of it sounded like, well, and then there's things that are negotiable that if countries are working with the administration, there may be more flexibility on how much of this tariff will apply.

5:13 I don't know. I think there's a lot of questions about industry carve-outs and all this. Unfortunately, that is harder policy becomes a little less predictable and a little bit more of an unknown for planning. But that's what this ultimately comes down to for, I think, the economic and market considerations. Just as an aside, while we're recording this show, it is April 3rd, the day after the president's comments and markets are down today. Everyone's tariff concerns are on everyone's imagination of what does this mean?

5:54 How's it going to play out? What's the good? What's the bad? It's the uncertainty word again, popping up. I think the challenge of this becomes for corporations to know, they don't just suddenly start building plants and it's productive next week. It's, do I want to invest? How many years will this take? How much benefit? How long will it take to recover that cost? This is something that takes time to measure, evaluate, and derive consequential change. Jeff, I can tell you have some things to say. Go for it.

6:35 There's so much to say. I think the most enlightening part of yesterday's speech were these charts. They're all over the news right now about how much a given country charges us and how much we charge them now and before. You look for patterns. I always look for patterns, try to get the rationale. There aren't any. Europe, European Union, obviously a developed area, a developed continent. Australia, a developed continent. The amount of tariffs that they charge us aren't the same.

7:16 They're not even close to the same. Australia does 10%. European, it's much higher. Then you mentioned third world developing countries. You and I spoke offline this morning about Vietnam. Vietnam charges, I think, 90 some odd percent tariff. We talked about, well, that's because they need the revenue. We understand they were developing. Since COVID, a lot has happened to Vietnam with on-shoring in Vietnam, a lot of manufacturing. Still, that tariff sticks, even though they have their own economic development and economic progress.

7:57 Seeing these numbers of around the world and what they charge us, I was aware of the ones that make the news most of the time, China, and certainly a lot in the news lately about Canada and Mexico. But seeing how the United States is treated in trade across the world, I can understand the president's motivations of wanting to reset that and make it a more level playing field for our companies, our US companies who manufacture things. Obviously, the drive to want to bring manufacturing back, I think, is valid. We saw that even under the Biden administration with the CHIPS Act. There's a recognition for our economic security and our military security and our everything security that some things need to be made, at least in part, in the United States.

8:47 CHIPS, in that case, I think one of the big news items this morning, which I didn't realize, I feel like I'm less educated than I maybe thought I was, but that most of our pharmaceuticals are actually manufactured overseas. I guess I hadn't seen that before. There's merit in that, too. I think the shock to the system, the uncertainty is, one, how we have been treated by other countries, and two, is doing it all at once rather than trying to do it piecemeal with one-on-one private talks and try to renegotiate things is causing this uncertainty in the market.

9:28 I think the goal is a laudable, whether or not it's a prudent decision to do it all at once with a heavy hand and throw this uncertainty into the business climate, and the financial markets will be told over the weeks and months and perhaps years to come. I think some of the concern that markets have relates to this big change, and then, of course, the question of how much this is permanent policy, how much is positioning for negotiations, which I think prior to this week, markets largely had discounted the tariff reality on the basis that they thought there'd be some haggling, this is part of a broader negotiation or something.

10:24 That still may be the case in terms of positioning. Well, we have until April 9th for a lot of these tariffs. Yeah. If they wanted to do it right away, why not do it right away? I feel like having a buffer before those tariffs kick in could be an invitation to... Even this morning, the Commerce Secretary was on CNBC on Bloomberg saying, our phone lines are open. Call us now. Number nine caller, you're on. Call us before April 9th.

11:05 Right, right. Before April 10th to April 9th. And then I saw a post from Eric Trump saying, I wouldn't want to be one of the last people that call... One of the last countries that call Donald Trump, I guess, or implying that they're expecting deals to be made and who knows what will actually happen. But I did find it interesting that they were pushing out the start date for these. It could have just been, all right, we're announcing them and they're going into effect today or tomorrow, but that remains to be seen. So I think the concern that investors have is the question of, okay, will this create a higher inflationary environment?

11:51 Will this drive prices higher still? People have been concerned about inflation as an issue. I've seen some semantics discussion around, well, is it really inflation if it's one time? That's an increased cost, but it's not necessarily a higher rate of inflation. President used the word in his press conference yesterday that it was kind of a discredited word in inflation, but transitory. Yeah. And I think there's an argument to be made for that, that it's not necessarily expected to be ever increasing at a higher rate, but that is the assumption of, will there be reciprocal retaliatory response or will people respond in such a way as to reduce their tariff on US?

12:52 That's an unknown at this point. And I think that's one of the things that drives anxiety in the market. But if there is inflation, how does that become addressed? Similarly, we've already seen concerns about employment as it relates to what's happening in Washington DC with the Doge efforts to trim, we'll say in nice terms, to trim government and try to scale back some of the costs of government. That has also some ripple effect in terms of grants for research that has ripple effect on nonprofits, how they get funded, some of these that work with government agencies and so on, that there's likely to be some escalation of unemployment from that.

13:54 But then if people have, consumer sentiment, I think, has gotten a little bit skittish, does that translate to spending? If costs are higher, do I have less money to spend? Does that turn into an economic drag? Do we worry about recession? These are all things that you hear this evolution of thinking. And if there is a recession, what does the Fed do? Does it reduce interest rates to stimulate or does it raise interest rates to try to reduce the inflationary effects of tariff impact?

14:36 Seems like the consensus is more leans towards stimulus, but that's one of these unknowns, right? And how does that lead an investor to position themselves in expectations of what will happen? And we don't have a similar model here to look back at history with all the changes that are being made at the same time in the reset of the federal bureaucracy. The anxiety that people have is, what was it, Smoot-Hawley? Hawley-Smoot, what's the right name for that tariff? We can refer to Ferris Buehler again.

15:16 We could. We could have that prepared. We're only 16 minutes in before the first mention of Ferris Buehler. Yeah. Well, in any case, anyone, Buehler, that lecture, he was talking about tariffs and the idea that it was at the outset of the Great Depression. It was not a standalone issue, I grant you, which I think is where some of the thought is, but it was one of the things that led to an economic slowdown. I don't think that's in question.

15:58 You don't think the imposition of the income tax was a greater influence in the survival? What year did that happen, Jeff? Well, it didn't create the Great Depression, but - It happened in the 1900, 1919 or something like that, 1912, the income tax. The tariffs were closer to the 1920s, and that's the period closer to the... Am I wrong? You might be- I don't have my historical calendar in front of me here. Yeah, me neither. But- That was my earlier point. We don't have a modern reference to a change in the way tariffs have been handled all at once.

16:43 Either the imposition of the United States at one point where the federal government was relying on them, this is the date we're struggling with, and then the change to an income tax. We don't have a modern period of time or change of policy that's in this modern economy for us to really review and say, well, in 2008, during that financial crisis, this is what happened, or during the pandemic of 2020, this is what happened. Other people are going back to 100 years ago to say, well, what caused what?

17:23 And that's not really the... You can't make that analysis. So much is different in our economy. The lesson of that, Smoot-Hawley, was that tariffs went up significantly, it slowed the economy, and that was one of several things that led into the Great Depression. And I looked it up, it was 1930 for that act. We'll look up when the income tax started as well, so we have that if we want to. But anyways, I think probably the bigger question for everybody is, I mean, I've heard people concerned like, oh, this is going to lead to product shortages and things of that sort if this really were to escalate as a, I hate to use the word trade war, but if it escalates in its trade challenges.

18:17 We'll see, right? I think the bigger issue is how should a consumer, an investor think about their portfolio? What are the things they should do? I mean, I think just fundamentally, all of this, what we're talking about, markets back to this idea that there's going to be uncertainty. And that's just a matter of fact right now. There hasn't been, we haven't increased tariffs as much since the 1930s as we've just talked about. So there's just a lot of unknowns. So with unknowns in the market come volatility. So I think that's, I see that again and again, but just an expectation of volatility in the mid to near term, I think is probably a fair bet.

19:04 Yeah. I think that that's a great start. Look, expect volatility. We're in this period of uncertainty. There's how the economic impact will play out, how the market, we're just, as we're talking about just amongst us, what's this mean for revenue? Well, who's going to absorb what? How's the consumer going to react? How's this going to affect spending and what's going to happen with prices? What countries will respond what way versus another? There's all this that remains yet to be determined, right? So in the near term, there's increased volatility and that's likely to be the case as we have until this shakes out, until there's a little more clarity around it.

19:48 Now, markets historically, we know that it's not uncommon at all for markets to go down 10%, 20% from their highs. This is normal market behavior. We are looking at, we looked at the S&P 500. We're a little lower than 10% off the highs, which were in mid-February. We're somewhere around 11% or 12% off that. But your date, that's not where we are because we went up before we went down. Somewhere around 7% when we're recording this. It'll change by the time you listen. Who knows what it'll be.

20:30 But you follow my point. This is normal to start with. This is normal behavior, range of movement, not in itself something to get overly anxious about. That being said, as investors, we think about the what-ifs. How might this impact things? Stocks move over time by expectations of earnings over a prolonged period of time. It's a current willingness to pay for future earnings. This naturally comes into how do we envision the change in valuation if there is some?

21:12 We don't know the answer to that yet. I think we have to be ready to tolerate volatility until we have better clarity around that and be willing to decide what action comes out of that. We've been talking about other considerations for a while. The start of the year, we talked about extended valuations. That was a good reason to scale back on your equity allocation. We've, in our strategies, made adjustments previously in anticipation. There are times we make changes responsibly to what's going on.

21:54 So as an investor, I think that's reasonable as long as it's measured. We want to think about what's my tolerance as an investor? What's my willingness to endure volatility? What's the expectation for performance I have? And design the portfolio around that. Now, sometimes we say, I still feel like I'm a conservative investor, and I want to be invested in keeping with that or a moderate investor or whatever it might be. I want to remain in keeping with that. But gosh, I sense that maybe I'm not positioned in the best place right now. I want to have a little more of this and a little less of that. That's a reasonable adjustment, right?

22:36 Or maybe you'd say, I want to have a little more cash for the unexpected. Oh, this seems like this could create some disruptions in availability of goods or something. Oh, well, maybe it's a good idea to have some reserve. We talk about that always with clients about having some liquidity reserve. But these are the times when you say, oh, this may be one of those reasons why, right? So one, is it too late to think about any kind of an adjustment in your portfolio? I would argue no. If you said, gee, I think I've been taking too much risk. I've had a great return, but maybe I'd like to scale it back.

23:20 But is it too late because the market started to decline? When you think about the fact that you're in an asset allocation, even if the market's down 6%, 7% at a given point in time, that's not from the year to date, 10 or whatever from the high. That's not outrageous when you think about, we just went up like 45% in two years or whatever it is. So sure, maybe give up a little bit. But if you need to scale back the risk, it's not unreasonable to do that today. It's starting to get to the point where you might be better off to not think. It might be better off to wait to get to the other side because we don't know how long this will take and all that.

24:04 But I would still say incremental adjustments is not unreasonable. But what we don't want to do is sell low and buy high. We don't want to be in a position where we've behaviorally done the wrong thing. So if we're talking about something measured in incremental, that can have merit. But let's not overreact. Let's not sell everything. Let's not run for the hills. Again, we're talking in generalities, your specifics, talk to your advisor. If you don't have an advisor, call us. We'll be happy to talk to you, see what your circumstances are, see how it fits into your financial plan, how it all fits together.

24:50 Very well said, Chris. Asset allocation is a really, as we talk about all the time, such a key component to part of what we do. And what gets in our brains and what we think about is what's in front of us, in this case, tariffs and the news. And it can be very emotional. We haven't had many people calling about how well the bond market has been doing. Yeah, good point. Right. So having some diversity in your asset allocation for times like this can really add a benefit. And so if you're all in on stocks, this is a rough period of time for you. If you're all in on bonds, you've been having a good time for a few months now.

25:34 But the answer is probably somewhere in the middle for most clients where adding a diversified portfolio can not only give you some peace of mind, but if you do need to withdraw some money, if you do have a liquidity need beyond what you have in reserve, you have the option of taking from maybe parts of your portfolio that have not suffered any downfall, if you will, from tariffs in this case. And I think your point is a good one. And I think oftentimes we dwell on things for good or for bad based on what we consume. So maybe turn off the TV, turn off the news, change the channel, get some multiple perspectives.

26:24 So some people are talking about all the great opportunities this might generate. And that might be something you get more enthusiastic around. Other people might be focusing on some of the risks. When markets go down, we hear more of the risks that people are anxious about. So that's maybe why I'm speaking more to that, I think. But there's two sides to every coin, I guess. And including in this tariff debate, there are U.S. companies right now that are thrilled about what President Trump is doing. And there's going to be additional investments and employment because of what the tariff policy means to those individual companies.

27:07 So I think the market movement is more about, as Russ said earlier, about volatility and uncertainty than it is about earnings. We're too early in this discussion to really understand what these tariffs are going to do to the S&P 500. You have to really look at it. If Brian was on, he'd be talking about this, our senior portfolio manager. You have to look at this company by company, industry by industry. And some of them will definitely benefit from having a more isolationist point of view of bringing manufacturing back or making trade more fairer. Yeah.

27:48 And there are companies that are less impacted by the type of issues that tariffs create. They're not necessarily importing product or service in the creation of their services or their own products. I'm thinking in terms of companies that are more like this area of technology in some spaces. Some have lots of production that's done overseas, but some are doing different kind of content that doesn't necessarily require that tariff consequence.

28:32 And so will that create opportunity? Will that create maybe some buying? I think it will. I think it will. And maybe some markets will open up to U.S. companies that were previously limited by super high tariffs in this. Hopefully, what we have is a negotiation and there's calmer minds than the news people. There's calmer individuals in the state department and so forth, commerce department who are going to make better deals for America. So what's the opportunity for the individual? I was thinking, what should we be thinking about as investors?

29:12 One is make sure your allocation is positioned well. Number two, make sure you have the liquidity reserves that is a good... And again, we can offer guidance. Your advisor can offer guidance as to how to think about either one of those subjects. And then maybe opportunistically, there may be investment opportunities, but there may be tax planning opportunities. Maybe there's some capital loss harvesting to take advantage of, be able to sell something that's been at a game that you couldn't really right size without a big tax burden. Maybe now you can with a little bit of offsetting. Maybe there's some Roth conversion opportunities that you might want to think about.

29:57 There can be a variety of things. You look like you had something in mind you were going to add in Russ as opportunities. No, I mean, I guess as I'm looking at my Roth IRA and thinking, wow, this is great. I haven't seen... Time to make an annual contribution, right? Right, exactly. So it's all, I think it depends on where you're at in life, but big picture, it's so easy to get caught in that. We've talked about it before in this day -to-day mindset, like, oh my gosh, what's going on today? Do we sell out? Do we go to cash? But when you take a big picture view, it could be a good time to buy at lower prices than it has been recently.

30:41 So not saying that that's a general recommendation for everyone, but when I'm looking at my Roth IRA, I'm like, wow, this is a great chance to put some cash in. So we encourage you to think that way. And if you have concerns as you think about your portfolio, might be time for a portfolio review, get a real fresh set of eyes on what's happening. How should I be positioned given what's happening in the world around us today? Where do I have risks? Where do I have opportunities? What are some things I might want to adjust? Am I overstated in some space or not?

31:22 These are things that we help people with. We often like to do it though, in the context of a financial plan so that we see, how does this forecast over time? That's something we've been talking about with clients a lot lately is, yeah, what if the market goes down from here? How does that affect stress test your plan? What happens then? And then oftentimes people are like, oh, that's great to know. You know, that does put it in perspective, right? And how that can, what should I expect? And is it really something that will be disruptive to my future? That kind of thing. So if you need help with any of those things, don't hesitate to reach out.

32:04 We can be reached locally at 508-771 -8900, toll-free 866-771-8901. And you can always send us an email with your questions about show content or to reach out to connect with you at amr -info at wealthenhancement.com. Hope you'll share this content with others. Give us a rating and a like, really helps others find the show. With that being said, thanks everybody. Until next time, keep striving for something more.

33:03 Send us your questions to amr-info at wealthenhancement.com. or conduct their own due diligence before making any financial decisions.