On Tariffs the Economy and Your Portfolio
By: Larry Eppolito, MBA, CFP®
Greetings!
The topic of tariffs is back in the headlines, sparking discussions about their potential impact on the economy and investment markets. Given the noise surrounding these developments, let’s take a step back and focus on what really matters: the long-term picture.
First of all, as you know, I write in economic and financial terms – not political terms. What’s the difference?
On Economics versus Politics
- Economics examines the impact of tax cuts or increases.
- Politics is about who benefits from those tax changes and by how much.
Who Pays? You do. How so?
Tariffs are essentially taxes on imported goods, aimed at protecting domestic industries or addressing trade imbalances. Who pays? The importer pays the tax – not the business in the exporting country. This means businesses and consumers in the buying country pay the tax. This is why it’s said that “tariffs cause prices to rise.”
Why Raise Prices for Your Own Consumers?
Tariffs motivate consumers to look for domestically produced alternatives – as they do not have a “tariff tax” and may be less expensive. This discourages buying of imports and helps domestic producers.
So, while they can lead to higher costs for businesses and consumers, they can also encourage domestic production, protect strategic industries, and reduce reliance on foreign supply chains. The net effect depends on the extent of tariffs, any retaliatory measures, and how businesses and consumers adapt to changing trade conditions and so on.
What’s Really Going On?
Trade policy is often a complex negotiation tool rather than a permanent economic shift. Markets tend to react quickly to tariff announcements, but history shows that many of these policies evolve over time. The initial market response – whether positive or negative – is rarely the final outcome.
We’ve Been Here Before – But Not to This Degree
In March of 2018 President Trump imposed tariffs on steel and aluminum imports from China. China retaliated. That trade war ramped up slowly. In January of 2020, the U.S. and China signed the Phase One Trade Deal. In spite of the deal, many of the tariffs stayed in place, and the process of shifting supply chains began and has been ongoing. Keep in mind, China is a different trade partner than Mexico and Canada.
How Do Businesses and Consumers Adapt?
As I’ve written many times, we adjust. Consumers adjust, businesses adjust, supply chains shift etc.
To avoid tariffs, companies look for alternative suppliers in different countries, leading to supply chain diversification (e.g., shifting manufacturing from China to Vietnam, Mexico, or India). Some businesses reshore manufacturing to their home countries to avoid trade barriers.
Globalization was the word for many years. And buying less expensive products and supplies from lower cost countries was a major force keeping prices down in the U.S. This began to change during Mr. Trump’s first term, when he first began using tariffs as a barraging chip to force down high tariffs on US exports and to try to motivate some production to come home to the US. This process has been ongoing, although it is far from being complete.
What’s the Likely Outcome?
Although impossible to predict with certainty, past trade tensions suggest that while some tariffs may persist, many are scaled back or modified through negotiations. Over time, as consumers and businesses adjust, markets tend to find equilibrium.
Is the Process Pain Free?
Probably not. There will likely be retaliatory tariffs in response. Due to short term supply dislocations, companies may experience shortages of critical components. This may affect industries including automotive, electronics, and pharmaceuticals. So, there will be shortages of finished goods.
We’ve seen this before. Due to post-Covid pent-up demand there were shortages of critical components and we endured a period during which there were shortages of many materials and finished goods (Cars, lumber, doors, etc.). Although the shortages occurred for a different reason, they were similar in nature and were often very frustrating.
How Much Inflation Will Result?
Although no one knows, economic theory holds that, when prices rise due to shortages or taxes, consumers tend to reduce spending in other areas. In this sense, higher prices act as a form of taxation—if you spend an extra dollar on one item, that’s one less dollar available for something else.
So, although shortages and taxes can drive prices up, they don’t necessarily lead to the harmful kind of inflation, where "too much money chases too few goods and services." That type of inflation typically occurs only if the central bank (The Fed) injects excessive money into the economy, further fueling price increases.
How Could This Affect Portfolios?
Markets dislike uncertainty, and tariff discussions can contribute to short-term volatility. Some industries may face challenges, while others could benefit from shifts in trade policy. However, our investment approach is designed to navigate economic ups and downs. Diversification, strategic asset allocation, and disciplined planning help ensure resilience through market fluctuations. As I’ve written many times, smart investors “pre-plan” for difficult times via their asset allocation. This is something we discuss in our reviews.
Staying Focused on the Long Game
Rather than reacting to headlines, we remain committed to a long-term investment strategy. Economic shifts, policy changes, and market cycles are inevitable, but our approach is built to manage these risks and keep you on track. We set allocations to weather uncertainty, ensuring your financial plan remains robust despite short-term turbulence.
In summary:
- I believe the U.S.’ new trade policy is more of a complex negotiation tool than a permanent economic shift.
- Past trade tensions suggest that while some tariffs may persist, many are scaled back or modified through negotiations.
- Depending on how long any tariffs remain, prices will rise due to the tariff and due to shortages of critical components causing shortages of final goods.
- We’ve been here before in recent years – but possibly not to this degree.
- Consumers adjust, businesses adjust, supply chains shift etc.
- I believe President Trump is negotiating. He has been known to turn on a dime, but any trade war could last for quite a long time.
If you have any questions or concerns, please feel free to call me or Michael.
Let us go forth and keep the faith, as always.
Best!
Larry
P.S. Please feel free to send this along to those who may benefit.
Larry Eppolito, MBA
Managing Partner, Eppolito, Carbone & Co.
Senior Financial Advisor, RJFS
CERTIFIED FINANCIAL PLANNER™ Professional
Eppolito, Carbone & CO., LLC
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Important disclosures
Eppolito, Carbone &Co., LLC. is not a registered broker/dealer and is independent of Raymond James Financial Services. Investment advisory services offered through Raymond James Financial Services Advisors, Inc.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and federally registered CFP (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.
Sources:
- The Wall Street Journal
- Raymond James Washington Policy Weekly Wrap, Ed Mills, Alex Anderson
- Raymond James Weekly Investment Strategy
- Raymond James Weekly Institutional Equity Strategy
- Raymond James Weekly Economic Release
- Raymond James Daily Morning Brew
- The Wall Street Journal
- CNBC Professional
- Bloomberg News
- Financial Advisor Magazine
- New York Times
- The Boston Globe
Important Disclosures
Any opinions are those of Larry Eppolito and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change. This information is not intended as a solicitation or recommendation of any kind. Investments mentioned may not be suitable for all investors. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Diversification and asset allocation do not ensure a profit or protect against a loss.
Keep in mind that investing involves risk. The value of your investment will fluctuate over time, and you may gain or lose money.
Stocks offer long-term growth potential but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations and the potential loss of principal.
Investing in fixed income securities (bonds) involves certain risks such as market risk, if sold prior to maturity, and credit risk, especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than original cost upon redemption or maturity. Bond prices fluctuate inversely to changes in interest rates. In other words, if interest rates rise, after your purchase, you may receive less than your purchase price should you liquidate early. Bonds provide a fixed rate of return if held to maturity.
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