Market Volatility and the Unknown Long-Term Impact of Tariffs
The first quarter of 2025 has been challenging for stocks, with tariff uncertainties and escalating trade tensions driving prices downwards. The S&P 500 fell over 9% in the first week of April and is now down 18% from its February high (as of April 8th), though still up about 40% from its October 2022 low. These developments have raised concerns about higher consumer costs and potential supply chain disruptions, impacting both corporate earnings and overall economic growth.
The scope and scale of the recently announced tariffs surprised financial markets and hit consumer confidence hard. Historical parallels to a tariff-heavy regime are limited (e.g., 1930s Smoot Hawley ended badly), making it difficult to estimate the full impact on the stock market and supply chains. Regulations don’t require companies to disclose many details about their overseas exposure, adding to the uncertainty. There is confusion about the White House’s plan, with no clear end game in sight. Are tariffs here to stay? Is this the start for further negotiations? Has there been any movement towards agreements? No one knows, and that is the problem the markets are facing.
Regardless, we should not expect a quick reversal or a sudden boost to consumer spending and income. Business sentiment has also fallen, adding uncertainty and making a pickup in business investment less likely. This development is almost assuredly negative for economic growth in the near term, increasing the possibility of a recession.
While uncertainty and market volatility may be elevated in the near term, experts generally agree that stocks remain attractive for long-term investors. However, predicting the near future has become very difficult.
Putting Volatility into Perspective
Although market pullbacks can feel unsettling, it’s important to remember that the current downturn remains within historical norms. For instance, the S&P 500 is down approximately 18% from its recent high, which is not far off from an average intra-year decline of 14% over the past 35 years. Keeping a long-term perspective is key during such times.
Current Economic Landscape
Despite the challenges, there are still some areas of stability. Inflation has not re-ignited yet, and the labor market remains steady for now. However, consumer sentiment has declined to a two-year low, reflecting concerns about future business conditions, inflation, and unemployment. Overseas markets, which have lagged behind the US market for years, are now performing better than the US, emphasizing the value of international diversification.
Beyond tariffs, my greater concerns include cuts to science and other research that have propelled America forward, the potential for a ‘brain drain’ from the US to other countries, and reductions in essential social services that support everyday Americans. Additionally, there is the risk of increased tax burdens for the lower and middle classes to support continued tax cuts that primarily benefit those at the highest ends of the wealth distribution. A slowdown in worker productivity and economic growth, coupled with the possibility of increased inflation, could result in a dreaded stagflation scenario.
Opportunities in Diversification
To protect against a decline in US growth, it may be time to start focusing elsewhere. International markets present attractive opportunities due to lower valuations and future growth potential. Bonds have once again offered some stability amidst current U.S. stock headwinds. The Federal Reserve’s steady interest rate policy, with the possibility of cuts later in the year, could provide some room for optimism. A well-diversified approach is proving effective in navigating these uncertain times.
What You Can Do Now
- Review Your Living Expenses: Examine recent expenses to determine monthly needs for necessities and additional living costs. Identify areas for potential reduction if necessary.
- Check Your Liquid Savings: Ensure you have an emergency fund to cover unexpected expenses or income disruptions. Aim for at least three to six months of living expenses in cash reserves, or more if you have one income, dependents, or a high salary. Retirees should target one to two years of anticipated portfolio withdrawals in cash reserves.
- Review Your Portfolio: Reassess your personal risk tolerance, evaluate the risk in your portfolios, and ensure your investments are well-diversified.
Staying Focused on Long-Term Goals
During this period of market uncertainty, maintaining a disciplined, long-term investment strategy is more important than ever. As behavioral finance expert Morgan Housel says, “Every past market decline looks like an opportunity, every future decline looks like a risk.” Staying informed and avoiding emotional decision-making are critical to achieving financial goals.
Sources:
https://finance.yahoo.com/news/why-its-impossible-to-know-what-will-happen-next-160001061.html
https://www.manning-napier.com/insights/market-update-our-views-on-the-tariff-news?
https://awealthofcommonsense.com/2025/04/a-short-history-of-tariffs/
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