Tariffs Take Off
Key Takeaways
The situation around tariffs is fluid and will continue to pivot quickly and unpredictably.
We believe the medium- and long-term risks to US economic expansion and disinflationary trends are still low. Presidents can implement tariffs easily, but they can also reverse course without much difficulty.
Broad diversification is still one of the best tools for investors to manage portfolio risk.
Trump 2.0 Tariff Policy Comes Into Greater Focus
On Friday, January 31st, President Trump announced 25% tariffs on imports from Canada and Mexico, and a 10% tariff on imports from China—on top of the existing tariffs on China. This latest announcement of Trump Tariffs 2.0 came as a bit of a surprise to market participants (particularly the speed at which tariffs could come into effect) but is consistent with the tariffs he imposed in his first term (Trump Tariffs 1.0) and with his view on tariffs as a policy tool. The response was swift but short-lived, because following negotiations with Canada and Mexico, the application of tariffs on these countries was delayed until March. Nobody knows when tariffs will be implemented, if at all, but nonetheless it’s appropriate to take this opportunity to assess their potential impact. For a deep dive into all things tariffs, watch this edition of Money with Murphy.
As shown in Exhibit 1, governments have used tariffs to protect specific industries and encourage domestic production throughout US history. But these benefits come with trade-offs, primarily of lower global trade and higher prices for consumers. At extremes, tariffs may even slow economic growth. Additionally, it is reasonable to assume our trading partners will respond to aggressive tariffs. Assessing these trade-offs, the risk to economic growth, and the response of our trading partners muddies the water for assessing near-term risk. Even with greater uncertainty, it seems like a safe bet that a more aggressive tariff policy would be a headwind to the recent disinflationary trends in the US, as well as to the stability of the US economic expansion.
Exhibit 1: U.S. Tariffs Have Risen but Remain Below Past Peaks
Federal Government Tariffs Collected as a Percent of All Imports, 1981-2022
Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and not subject to fees. It is not possible to invest directly in an index. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. Source: Kestra Investment Management and Council of Foreign Relations with data from the U.S. International Trade Commission. Data as of January 28, 2025.
Inflation and Growth Are Headline Risks to Tariff Policy
Tariffs, if implemented as suggested, are likely to be inflationary. The magnitude of that impact, however, is uncertain. For example, tariffs may increase costs to consumers—but that increase may be partially offset but a subsequently stronger dollar, which makes imports cheaper. A stronger dollar may give importers the ability to take on these costs without sacrificing too much margin, thereby insulating the end consumer. Sustained tariffs will force companies to make decisions about how much they allow increased costs to reduce margins or are passed on to consumers. These choices, in aggregate, could lead to higher inflation in 2025.
While there are a wide range of outcomes on inflation, we can look to Trump Tariffs 1.0 to help understand the impact of this policy, as shown in Exhibit 2. This latest round of tariffs will be different in scope and implementation than those of 2018, and those details will matter in how the effect flows into our economy.
Exhibit 2: Tariffs Boosted Consumer Prices During the Last Trade War
Source: Goldman Sachs Global Investment Research with data from the U.S. Census Bureau and Haver Analytics. Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and not subject to fees. It is not possible to invest directly in an index. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. *Includes laundry equipment and other appliances, furniture, auto parts, and housekeeping supplies. Items are weighted by relative importance to headline index. Data as of January 28, 2025.
This inflation risk, in turn, could slow economic growth the US and make it harder for the Federal Reserve to cut rates further. As of this writing, market participants were still expecting about 2 rates cuts in 2025, but there is more uncertainty about that result than there was last week. If the Fed assessments are that tariffs are inflationary, rates are likely to stay higher for longer. Alternatively, if the economic slowdown is stark enough, they could choose to lower rates to buoy economic growth. At this point, speculating on either path is premature.
The Only Thing Certain is Uncertainty
It is possible that the turmoil over the weekend is a negotiating tactic by President Trump. He has a history of using the threat of tariffs to extract concessions from other countries, as seen in his last term. In fact, we have already seen the tariffs against Mexico and Canda be delayed by one month, following negotiations between President Trump and Mexican President Claudia Sheinbaum and Prime Minister Justin Trudeau. So, there is supportive evidence that the 800-or-so words it has taken us to get here are just a long-winded way to say that tariffs are just one tool in President Trump’s negotiating toolkit.
But the speed of tariff announcements, and how quickly they changed, speaks to the difficulty of navigating this uncertainty. If it is this hard to just keep up with the headlines, how should we think about navigating this dispersed range of outcomes regarding our portfolios?
It is helpful to remember that tariffs can be removed as quickly and as easily as they are applied. Presidents can reverse course on tariffs without much difficulty, which we think makes the long-term implications of tariffs less impactful. Long-term investors will be happier (and likely richer) by focusing on choices they can control rather than focusing on changes to tariff policy.
Uncertainty is the state of the world, and the recent tariffs only bring that reality into greater focus. Given all the unanswered questions around key policy questions, diversification remains more important than ever. Broad diversification is still one of the best tools for investors to manage portfolio risk and position themselves to meet their long-term goals.
The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Advisor Services Holdings C, Inc., d/b/a Kestra Holdings, and its subsidiaries, including, but not limited to, Kestra Advisory Services, LLC, Kestra Investment Services, LLC, and Bluespring Wealth Partners, LLC. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by any entity for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was created to provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation. Kestra Advisor Services Holdings C, Inc., d/b/a Kestra Holdings, and its subsidiaries, including, but not limited to, Kestra Advisory Services, LLC, Kestra Investment Services, LLC, and Bluespring Wealth Partners, LLC. Does not offer tax or legal advice.
