The markets have been shaken recently following the announcement that the Federal Government will implement sweeping trade tariffs on goods imported into the United States. Many are now questioning how these measures might affect their retirement accounts.
Understanding the Economic Rationale Behind Tariffs
The White House has justified these tariffs as a strategy to:
·Address trade imbalances: Tariffs are aimed at trade disparities between numerous countries and the U.S.
·Reviving manufacturing: The White House estimates that approximately 90,000 factories have closed in the United States since the implementation of the North American Free Trade Agreement (NAFTA) in 1994. Tariffs are being positioned as a tool to incentivize domestic production and create jobs.
·Protect agriculture: Some U.S. farmers face steep foreign tariffs from places such as Japan and Canada for their products. These measures aim to shield American agricultural producers from such barriers.
·Enhance economic security: By reducing dependency on foreign goods, the policy seeks to strengthen supply chains and shift tax burdens to foreign entities via import taxes.
The Short-Term Results: Markets Tank
The equity markets reacted in recent days by a swift downturn that erased billions in market value from major U.S. stocks. The bond market has faired better with yields dropping and providing a ballast for investors during this time of volatility.
Key Implications for Trade Partners
Countries that are heavily reliant on exports to the United States, such as China, Vietnam, and Malaysia, will face significant challenges due to increased tariff rates, with some Chinese goods subject to tariffs as high as 145%.
Takeaways – Deglobalization Continues
The tariff policies reflect broader deglobalization trends aimed at prioritizing American industries and reducing trade deficits, where the United States imports more than it exports. While these measures may cause significant short-term market disruptions, we anticipate that, regardless of the future direction of tariff policy, businesses and consumers will adapt to a new economic paradigm.
Implications for Investors
Despite low investor and consumer sentiment—both historically strong contrarian indicators—economic growth signals remain intact, albeit at a slower pace. Inflation signals are mixed, with the potential for “new inflation” driven by tariffs, though it is not expected to surge like it did in 2022. While the risk of recession is more elevated, it does not represent a new base scenario for our strategy.
So, the best advice is to stay invested and stay focused so you can stay on track.
Predicting how the market will react over the short-term is nearly impossible. Even professionals struggle to accurately time the market. So we suggest you stay diversified and focus on the long term. Thinking long-term allows you to benefit from overall market growth without the stress of trying to guess short-term moves. Remember to accurately time the market you have to be right twice: once when you sell and again when you buy back in. We’ve found the second move is much more difficult to get right.
Did You Know?
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