U.S. Announced Tariffs and Investment Implications
The last 6 weeks of the first quarter 2025 were characterized by increased economic and investment uncertainty, much of it due to lack of clarity regarding U.S. tariff policy and resulting concerns about short-term detrimental inflation and growth.
Additionally, the U.S. tariff proposals announced on April 2 included much higher tariffs than originally anticipated. For example, the announced tariff on Vietnamese imports was 46%. As Nike has shifted much of its imports from China to Vietnam, this was a rude awakening for Nike and its shareholders. As this experience was repeated for many other countries and U.S. companies, the result was a large decline in U.S. stocks, particularly those sensitive to tariffs or to a slowdown in consumer spending. The VIX (fear index) was near 40 on April 4, signaling great distress, close to panic levels.
What has been done or should be done because of this new trade paradigm? First, we are not sure that this isn’t mostly a negotiating tactic to get other countries to reduce their tariffs and trade barriers. Israel announced the elimination of its tariffs on U.S. products as they have a lot to lose if U.S. announced tariffs are implemented. Vietnam and India have also rolled back some tariffs or are considering it. It would not be surprising to see significant tariff relief over the next few months. If the worst of these tariffs never occur, then the recent economic and market pessimism can reverse.
WESCAP’s large allocation to high-quality fixed income assets is providing a strong buffer to current and possible future price declines in “risk” assets. Additionally, we will not be forced to sell stocks at unreasonably low prices to fund any client cash flow expenditures as they generally have adequate low-risk fixed income assets available to sell. Therefore, if some asset prices continue to decline, we can wait for a price recovery before selling. This strategy was used to great effect during the 2000-2002 burst internet bubble, the 2008-2009 financial crisis, and the 2020 Covid shock.
Nevertheless, the current tariff uncertainty and deterioration in consumer and business confidence could create more price declines before recovery occurs. We may adjust our asset allocations further to an even more defensive stance, though we are reluctant to do so immediately during panic selling conditions. Most major price declines have counter-rallies, so it would not be prudent for us to act at the same time and manner as panicked sellers and computer-driven trend-following algorithms.
In late March, various sentiment indicators (Michigan Consumer Confidence, AAII bull/bear surveys) pointed to extreme pessimism towards the economy, inflation, and U.S. stocks. However, these tend to be contrarian indicators, as the U.S. stock market tends to be up by double digit percentages 12 months later. Extreme pessimism is rarely justified by subsequent events, even if some of the feared outcomes come partly to fruition. Following the crowd and selling near a volatile low point rarely works well in the longer run.
In addition to new tariff issues, some fundamental headwinds to U.S. growth appear to be developing—consumer default rates rising, slowing home sales, fewer new jobs becoming available, and other factors. If growth and consumer and business spending slow further, this will have repercussions for many firms’ earnings, even if such slowing is not enough to trigger a recession.
Continued domestic policy uncertainty suggests not becoming overly aggressive on the investment front in the near term. For now, WESCAP continues to favor value stocks over growth stocks, certain hedged strategies, fixed income and other investments that can benefit from stable or declining interest rates.
Please contact us if you want to discuss this further.