Tariff Tantrum
Major themes can dominate the news cycle. In 2022, it was inflation. 2024 was all about AI. This year is shaping up to be tariffs.
And markets don’t seem to like tariffs. Click on the following link to see how markets have performed in 2025 (through 3/10/2025). We also included three previous market downturns - 2018 tariffs and rate hikes, COVID, and recent inflationary spike - for perspective.
Pay attention to the final two rows in particular. Diversified portfolios have fared pretty well to start the year, as well as following previous market downturns.
As investors, our instinct in times like this (i.e. when stocks are falling) is often to want to act. It gives us a sense of control.
We would generally caution against making big changes based on short-term market changes. Long-term investment plans usually take these periods into consideration. However, here are four strategic moves worth considering in periods like this.
Revisit diversification: At the beginning of the year, we wrote about how diversifying away from US stocks drug on 2024 returns. A global balanced portfolio returned almost 7%, while the S&P 500 returned 25%. The beginning of 2025 is a good example of why we encourage investors to remain diversified. Through yesterday, the global balanced fund has returned about 2%, bonds have returned about 2.5%, and the S&P 500 is down a little more than 4%.
We diversify to manage risk, not to maximize returns. If markets have you feeling nervous – which is completely normal under these circumstances – remember that you likely own more than the S&P 500. Diversified portfolios have a strong history of weathering market storms. Lastly, having a financial plan or written investment plan can help avoid emotional decisions.Invest excess cash or rebalance: Higher interest rates in recent years have attracted a lot of capital to high yield savings accounts, money markets, and other short-term savings vehicles. Historically, cash has been a poor way to grow and protect wealth. Consider reallocating or rebalancing into investments that can protect and grow wealth like stocks for longer-term goals.
Tax loss harvesting: This is about tax deferral, not tax avoidance. We wrote more about this here. Realized losses can offset realized capital gains, potentially reducing this year’s tax bill. The first $3,000 of net realized capital losses (i.e. realized losses minus realized gains) can be deducted from taxable income. Any remaining loss can be carried forward to future years.
Roth conversions: For those considering a Roth conversion, now might be time to act. Converted amounts – assuming they are coming from pre-tax IRAs – will be taxed as ordinary income. Lower account balances may mean fewer taxable dollars on converted assets. Details of both conversions and tax loss harvesting should always be discussed with a qualified accounting professional.
Coming into the year, we participated in a number of calls with investment managers and economists whose opinions we find valuable. All of them believed 2025 would be another year of growth. That is quickly coming into question.
Here are some of my favorite excerpts and quotes from the past two weeks, along with my quick comments.
Quote from J.P Morgan’s Chief Global Strategist David Kelly:
“The trouble with tariffs, to be succinct, is that they raise prices, slow economic growth, cut profits, increase unemployment, worsen inequality, diminish productivity and increase global tensions. Other than that, they’re fine.”
Ouch. Enough said.
From Capital Group:
Sometimes you have to “turn off the models.” The standard models for analyzing the global economy are based on 40 years of data that covers a period where the direction of travel was uniformly towards greater cross-border integration, not less. Inflation was low, not high. Add in the high level of uncertainty and you’re left with an environment where model results must be viewed with caution.
To me, this reiterates an important point. We need to approach investing and planning with plenty of humility. Just because something has not happened does not mean it cannot happen. I believe it’s important to study markets, history, and how people tend to behave in similar circumstances. But we should try to spend the majority of our time on things we can control.
From Ed Yardeni and Eric Wallerstein, via MarketWatch, after raising their odds of a tariff-induced recession from 20% to 35%:
The initial animal spirits of Trump 2.0 have been trumped by the uncertainty unleashed by “Trump Turmoil 2.0.”
Don’t get caught up in the actual numbers. Who knows if 35% is the right probability? In 2022, nearly all of the models said a recession was all but guaranteed. The bigger point that does make sense to me is risk of a recession is higher now than it was earlier this year or in 2024.
From Blackrock:
We maintain our pro-risk stance in the U.S…and believe there are opportunities today to take advantage of the resulting security dispersion and that it will be critical to ensure that portfolios [are] appropriately diversified.
Even if a recession is on the horizon, we don’t have to throw in the towel. Diversification can be important in periods like this. Correlation – or how different assets tend to move in relation to one another – tends to rise in stressful environments. Being diversified is more than owning a bunch of securities. Now is as good a time as any to revisit the risks in portfolios and make sure they are understood and intentional, to the extent that is possible.
Treasury Secretary Scott Bessent, via CNBC:
…there’s going to be a natural adjustment as we move away from public spending, to private spending. The market and the economy have just become hooked. We’ve become addicted to this government spending, and there’s going to be a detox period.
It seems hard to argue our debt and spending are sustainable. Similarly, it seems reasonable that a shift away from borrowing and spending will have consequences.
Volatility can be unsettling, but hopefully it reinforces the importance of staying diversified and disciplined. History suggests well-diversified portfolios can weather market downturns, and having a plan in place can help limit emotional decisions.
Please don’t hesitate to reach out if you would like to discuss more!
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