Good morning, happy Monday, and happy St. Patrick’s Day!
“For most investors: 99% of good investing is doing nothing, the other 1% is how you behave when the world is going crazy.”
– Morgan Housel, author of “Psychology of Money”
Well, my friends, it seems as if the world is going crazy right now. At least that is what the media is telling all of us.
As a general rule, I try to avoid market commentary because I believe it can divert our attention from what really matters: our long-term financial goals.
But here recently, the media is screaming at such obnoxiously loud levels that I feel it appropriate for me to chime in with some thoughts and perspectives.
For those of you who have been working with me for a while, what I’m about to say is not going to come as a shock: the world is not going crazy. Take a deep breath, the world is not coming to an end, this too shall pass.
Less than a month ago (February 18th) the S&P 500 closed at the highest level ever: 6,144.15. Friday’s close was 5,638.94. That’s a 505.21 drop equating to an 8.22% reduction from the all-time high.
You know what we call a 8.22% reduction in the investment industry? Normal.
Please pardon my sarcasm, but this is really not that big of a deal. I know the media is screaming garbage about recession and tariffs, but this is a very mild market adjustment. My concern level on a scale of 1-10 is hovering right around a 1.
The catalyst for this market adjustment (I’m not even willing to call it a drop because it’s so minor) has been primarily driven by tariff actions of the Trump administration.
As many of you know, I follow politics quite closely and hold very strong opinions. I’m the only person I’ve ever met who holds all the correct positions on all issues. LOL 😉.
I’m not sure when in the American political landscape we started blindly following our politicians, but I am not that guy, and Lord willing I never will be. I will call balls and strikes as I see them, regardless of political affiliations.
I personally believe that a number of issues the Trump administration is tackling have been exceptionally productive and beneficial for our country. The tariff issue is a bit more complicated, actually a lot more complicated, and as a general rule I am not a big fan of tariffs.
I am not a tariff expert, but from my understanding (if we oversimplify things) there are basically 4 different things that a tariff can potentially accomplish:
- Raise revenue for the government (it’s a tax that goes to the government)
- Used as leverage for negotiation purposes (I want something from you, so I threaten a new tariff or offer to reduce a tariff to accomplish another goal)
- Used as a penalty for some type of behavior (I don’t like what you are doing, so I’m going to punish you by imposing a tariff on you)
- Protect / grow the jobs of one’s own citizens (if a tariff means it costs more to import a good made elsewhere, a company may determine it’s better to have the product made domestically, thus creating more jobs inside the country).
In the case of China, the recent U.S. tariffs-imposed fall more in the 3rd bucket – the U.S. (Trump administration) wants to punish China for a number of offensives they see.
There are risks and benefits involved in a tariff strategy.
This 2 ½ minute video I found on X (formerly Twitter) does a really good job of explaining the tariffs, please take a few minutes to check it out: (19) Derrick Evans on X: “Here is a great video explaining tariffs. https://t.co/OxiWZaVGca” / X
As an example, let’s say I own a business that makes t-shirts. If I have my t-shirts made in Mexico at a cost of $3 per shirt and then it costs me $1 per shirt to get to my U.S. warehouse … that means I have a $4 per shirt net cost. If there is a 50% tariff imposed on shirts coming in from Mexico now my price per shirt is $5.50 ($3 for the shirt + $1.50 for the tariff + $1 for shipping). If I can make that shirt at my U.S. warehouse for $5 per shirt, I as a business owner would determine that would be the best action item for my business.
In this example, it would create U.S. jobs (that were previously in Mexico) for the people making the t-shirts, which would be a positive for the U.S. labor force (and a negative for the Mexico labor force), but it would also increase my cost per shirt by $1 (was $4 when it was made in Mexico, and now it’s $5 when made in the U.S.), so that cost would have be absorbed either by the business (unlikely) or passed on to the consumer in the form of higher prices (inflation).
One of the things that’s tricky about this situation is nobody fully understands Trump’s thought process … love him or hate him, he is a bit of a wild card. If these tariffs were permanent then the t-shirt owner would instantly change production to the U.S. (with its goods and bads), but if the tariffs are rescinded in a fairly short period of time the t-shirt owner would just wait it out until the tariff is eliminated or reduced.
Tariffs are not a new thing, almost every country imposes them. For many smaller countries, tariffs are the primary means of taxation. For other countries it’s an additional revenue source.
One quick example and I’ll wrap up. Canada currently imposes up to the following import taxes on U.S. products:
- Milk: 270%
- Cheese: 245%
- Butter: 298%
- Poultry: 238%
- Eggs: 163%
- Barley: 160%
- Sugar: 265%
- Peanut butter: 290%
- Rice: 150%
- Vegetables: 100%
I do believe that Donald Trump believes that this is not fair, so he is trying to level the playing field a bit in the tariff battle. Maybe by imposing tariffs on Canada, they reduce their tariffs on U.S goods if we drop or reduce our newly imposed tariffs. Or maybe Canada gets super ticked and adds new tariffs and then it becomes a tit-for-tat tariff battle, which is really not ideal.
Here’s the bottom line: the market loves certainty, and new tariffs create uncertainty. That is why we see recent market volatility.
Donald Trump is a businessman, and I believe that many of these tariff moves are very calculated. They do involve risk and short-term pain (what we’ve recently experienced with the markets), but if there is one thing Trump wants above all else is the success of the American economy. With that being the case, I think he will moderate his tariff position if it starts causing too much pain to the economy. If you recall, early in his first administration he went down this tariff path as well which caused some short-term market drops, so there is some historical precedent here.
Long story short: I’m not worried, and I would encourage you not to worry. Stay the course, be patient, diligent, and focused on your goals, this too shall pass.
Thank you for allowing my team and I to support you, even when the waters are a little choppy. We’ll get through it together.
Make it a great week ahead.