Stability Amidst Tariff Uncertainty: The Power of a Diversified Portfolio

Understanding Tariffs

U.S. tariffs on imports may introduce uncertainty, but a diversified portfolio provides stability.

Key Takeaways

• The United States is actively increasing tariffs on imported goods.

• Globally, governments are imposing more tariffs on foreign goods and services.

• Tariffs are tools to influence international policies, protect domestic industries, promote fair trade, and ensure national security.

• Despite their benefits, tariffs can also lead to higher prices and reduced employment.

The United States is ramping up its implementation of tariffs on imports from various countries! While the duration of these tariffs, the chance for exemptions on certain imports, and the potential impact of fluctuating currency exchange rates on the prices of imported goods in the US are still up in the air, there's an exciting atmosphere of change!

Amidst these uncertainties, there's a thrilling possibility for some short-term stock market volatility. But let's not forget the exciting fact that US economic growth and corporate profits have historically been the real stars driving financial market success, far more than any short-term government policy changes.

The Black Investors Coalition is optimistic and believes that keeping a diversified portfolio with broad exposure to global stocks and bonds across different regions and industries is still the best strategy for tackling market volatility, no matter what causes these short-term market shifts!

Understanding Tariffs

Tariffs are taxes levied on imported goods and services. Historically, governments have strategically used tariffs to achieve various goals, such as protecting domestic industries, penalizing other nations for undesirable actions, and securing national interests.

Following World War II, several major global economies committed to the General Agreement on Tariffs and Trade (GATT), which sought to reduce tariffs and enhance trade in goods and services among countries.

In the past decade, governments worldwide have reassessed the impact of free trade. Many have enacted policies to bolster domestic industries by raising the cost of competing imported products. The International Monetary Fund reports that the number of new tariffs imposed globally surged from a historic low of 239 in 2012 to 2,845 in 2023.

Understanding Tariffs

Tariffs crafted to bolster domestic industries and companies effectively increase the prices of goods and services from foreign competitors. This approach significantly boosts the attractiveness of domestic products to consumers.

Another significant type of tariffs includes countervailing or anti-dumping tariffs. Unlike those designed to give domestic producers a competitive advantage, these tariffs are crucial for promoting global trade by enabling a country to address perceived unfair trade practices by another nation. For example, an anti-dumping tariff may be implemented if a government believes that a foreign partner is unfairly exporting subsidized low-priced goods to weaken the importing country’s producers. The goal of this tariff is to raise the artificially low prices of foreign products, thereby ensuring fair competition between foreign and domestic companies.

How does the US utilize tariffs?

The United States government strategically employs protective tariffs to bolster domestic industries. Since 1789, when a tariff was imposed on foreign sugar, the US has consistently applied tariffs on various imported goods. In 2018, the US decisively imposed tariffs on $360 billion worth of imports from China, addressing the country's practices of pressuring US companies to surrender their intellectual property rights to do business in China. These tariffs largely remain in place, and last year, the US confidently implemented additional tariffs—some as high as 100%—on another $18 billion worth of Chinese goods, including steel and aluminum, semiconductors, and electric vehicles.

Responsibility for Tariff Payments

Companies importing products or services into countries with tariff regulations pay tariffs directly to government tax authorities. These costs are typically passed on to consumers through higher selling prices of the products or services.

Advantages of Tariffs

Proponents of tariffs assert that they protect established businesses and the individuals and communities reliant on them for employment and income. For example, since 1964, the United States has enforced a 25% tariff on imported light trucks. This tariff was initially implemented to penalize European governments, which the US administration accused of allowing European chicken producers to sell their products in the US market at artificially low prices. Over the years, this "chicken tax" has empowered US truck manufacturers to maintain a dominant position in the US pickup truck market, even as their share of the US car market (not protected by tariffs) has decreased from 90% to 40% during the same period.

Tariffs also bolster the development of what Alexander Hamilton referred to as "infant industries" until they can compete with foreign competitors. This approach is evident in recent tariffs designed to boost domestic production of medical supplies and semiconductors in the US, reducing dependence on foreign sources for these critical products.

Disadvantages of Tariffs

Critics assert that tariffs are harmful as they drive up consumer prices. However, the U.S. tariffs introduced over the past decade have not triggered a persistent inflationary trend. When the United States imposed its initial tariffs on China in January 2018, the Consumer Price Index (CPI) stood at 2.1%. By mid-year, inflation rose to 2.9% before decreasing to 1.9% in December, resulting in an annualized rate of 2.4%. Throughout the following year, despite ongoing trade tensions with China, U.S. inflation did not exceed 2.5% until the impact of COVID-19-related policies emerged in 2021.

Even with the possibility of additional tariffs, the Black Investors Coalition Research Team confidently predicts that inflation will maintain a "flattish trend" over the coming year. Nevertheless, they acknowledge that returning to the stable, low inflation levels of the past two decades will be "challenging."

Tariffs are often criticized for adversely affecting workers who might otherwise benefit from them. The argument is that tariffs increase the prices of imported goods, allowing domestic producers to raise prices for raw materials. This, in turn, raises costs for manufacturers of finished goods, who may be forced to lay off workers to maintain profitability.

Moreover, some argue that tariffs can impede economic growth. The Tax Foundation, which typically views tariffs skeptically, suggests that the tariffs imposed by the U.S. since 2018 are likely to reduce the gross domestic product (GDP) by 0.2%, and that proposed new tariffs could lead to an additional 0.8% reduction in GDP.

Implications of New Tariffs on Market Dynamics

As Stock Market Charlie, I expertly analyze historical trends to confidently predict future developments. When the United States initially imposed tariffs on Chinese imports, the impact was not significantly inflationary. However, the S&P 500 experienced a 15% decline from peak to trough in 2018. At that time, unlike the current situation, the Federal Reserve was raising interest rates, real rates were considerably higher, and notably, valuation spreads were narrow. Presently, valuation spreads are broad, indicating market uncertainty. This suggests that as uncertainty increases, the equity market is poised to continue its upward trajectory despite concerns.

Investors must always navigate uncertainty. Therefore, it is crucial to maintain a long-term perspective on your investments and regularly assess them to ensure alignment with your investment timeline, risk tolerance, and financial circumstances. Your investment portfolio should be strategically structured to achieve your objectives while providing peace of mind, irrespective of political uncertainties.

I strongly recommend that you, either independently or with your financial advisor, clearly define your investment goals and time frame, assess your risk tolerance, and select a diversified portfolio of stocks, bonds, and short-term investments that align with your investment objectives.

Best Regards,

Stock Market Charlie aka The Hound of 317