Tariff-ied? Our Touchstones in a Time of Trading Turbulence

At Yeske Buie, we don’t make predictions about markets or the economy. But we can say with a high degree of confidence that you’re going to be hearing the word “tariff” a lot over the coming four years (and perhaps the words “inflation” and “interest rates”, too). 

Every time a tariff-related headline runs, investors rush to see how markets are reacting to the news. It’s made for a choppy start to 2025 (albeit on a positive trajectory – our portfolio of stocks is up more than 4% year-to-date). 

So how should you react when you hear the latest story about duties being levied on Mexico and Canada (or that they’ve been deferred by a few weeks); or that we’ve increased our tariffs on Chinese imports (and they’ve hit back with tariffs of their own); or that we’ll be taxing imports of aluminum and steel or issuing reciprocal tariffs (as has been the focus of this past week)?

We thought we’d share our touchstones for dealing with all of this trade and tariff turbulence (a theme you’ve heard from us in the past, as you might recall). Here’s how we digest the headlines and decide what to do next. First, we focus on what we know:

1. 1. We know tariffs make things more expensive, as they’re an added expense (in the form of a tax) countries and companies must pay to do business.
   2. Because companies want to maintain their profit margins, the logic holds that they’ll raise prices in response to tariffs, thereby passing on those additional expenses to their customers.
   3. And when other nations retaliate by levying tariffs on US exports, the same upward pressure on prices is exerted in response.
   4. This is why the Trump Administration’s trade policies have been described as potentially inflationary.
   5. And in response, the Fed has made it clear it will use interest rates as its tool to curb present and future inflationary risks and will not lower rates while these risks persist (and it has no reason to – inflation came in at 3% this week, the labor market is still solid with unemployment at 4%, and the economy is growing at a healthy clip, nearly 4% over the past year).

Given what we know, we then filter each headline through a few checks to assess the magnitude of the risks posed by the potential policy initiative:

• • • Does this new development significantly increase the risk of a recession and/or instability in the financial system?
      • While there’s no way to accurately answer this question in real time, we can use the market’s response as a gauge to determine how investors are reacting to the news (more on that below). And, at present, banks are in good shape and the major banks have just had a strong season of earnings reports.
    • How might the Fed respond, given that it continues to focus on price stability (as that’s the half of its dual mandate that is currently not in line with its goals)?
      • Chairman Powell has made the Fed’s position clear, in that they’re in no hurry to cut rates. As long as the unemployment rate is at or near 4%, they have the latitude to be patient. Some economists are bracing themselves for a rate increase if President Trump’s tariffs take hold and put upward pressure on prices.
    • How is the market responding to all of this (the initial news and the reactions to it)?
      • This is perhaps the most telling part of the process, as we’ve seen President Trump walk back rhetoric time and again if it seems that markets don’t like his proposals. He has consistently demonstrated that he will compromise on his own policy initiatives in favor of positive market performance. Markets have seemed to digest the developments of the past month and taken everything in stride while posting solid gains. And they’ll continue to factor in new developments as they discount the expectations about the future into today’s prices.

So, the next time you hear new news about tariffs, we invite you to give this piece a read. And then remember that you own a globally diversified portfolio of investments that’s built to weather whatever the world or the White House throws at it. And that the Yeske Buie Team is on top of the latest headlines and ready to discuss any of this with you in further detail any time. 

Sincerely,