Many trade deals (or the framework for eventual trade deals) have now been inked. But despite the speculative frenzy in stock markets, everything hasn’t magically turned back to the way it was before the so-called reciprocal tariffs were announced in April and we had this super-short market crash. The trade deals all include much higher US import tariffs than before. Was that what the stock market was expecting with its monster rally since April? Much higher permanent tariffs?! There is a coming impact on either consumers, corporate profits, or a mix of both from these higher taxes, which is what tariffs are. And I don’t think the market is properly factoring that in.
Trade Deals So Far
First of all, calling these trade deals is very generous. They are more like frameworks to eventually work out a deal in which the counterparties have not firmly committed to anything.
To the Trump administration’s credit, the outlines of these trade deals do so far greatly favor the US. Assuming they get enacted, trade barriers have been opened for American companies; our tariff rates are higher, but in most cases, little to no retaliatory tariffs are being applied on our exports in return; and many countries/blocs are supposedly going to make large investments into our economy (the most suspect element of the deals).
It seems the administration was correct in its assessment that we had leverage. Since we import way more than we export (at least when goods are concerned), other countries’ competitiveness is hurt more by tariffs than we would be from any retaliation (except for with China). But it also could be that foreign trade negotiators are banking on being able to wait out President Trump’s term, stringing our negotiators along, or stalling until the tariffs are declared unconstitutional (which is a distinct possibility).
It’s too early to say whether this trading structure will ever come into existence in reality, and if it does, whether it will be successful or not. Because of this, I’m not sure this was all worth the panic, uncertainty, and volatility these policies have caused.
Focus on Leading Indicators, Not Trade Deals, Tariffs, or Trade Wars
I am not making investment decisions on your behalf based on speculation about any resulting trade deals or how the tariff saga will play out. Instead, I will continue to focus on the indicators I believe do tend to predict future stock and bond returns: recession and inflation indicators, stock market valuations, and price and interest rate trends. I stick to that systematic framework.
But overall, I expect tariffs to eventually lead to economic softness and deflation, which would mean stock prices (especially in the US) are too high and interest rates are too high. If you are an investment management client, you are already positioned accordingly.
We may be in for a wild ride in markets, so I appreciate your trust in me. I reiterate: My best advice for you is to never look at your portfolio, except maybe once a year when we discuss performance together at our Annual Meeting. And if you must look, at least look at the portfolio as a whole, not any one line item. By design, I build portfolios that mix components that zig and zag differently (hopefully on their way up long term), often placed in each account based on tax- and/or goal-based considerations.
It’s definitely more worthwhile for you to focus on the planning opportunities in your daily finances where you (and I) have much more control over outcomes. If you’ve chosen a tactical investment strategy, then you’ve agreed to judge performance on a five to 10-year time frame. So try to ignore the short-term as best you can. I would even go so far as to say ignore all market, political, and economic news headlines altogether, too. Here’s a perfect example: We were initially told 144,000 and 147,000 job gains occurred in May and June, but they were recently revised down to just 19,000 and 14,000! Would the market have been so positive on the economy and negative on inflation if it knew this before?
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