Sanity Check
Tariffs, the stock market and your investments.
It’s time to panic about your investments, or at least that’s how you might be reacting to the recently announced tariffs, stock market decline and the increasingly negative economic sentiment they are creating.
For anyone not paying attention, President Trump announced Wednesday sweeping tariffs on most of the world. All imports will be subject to 10% minimum tariffs, but imports from select countries are getting hit harder. This includes 34% on China, 20% on the European Union, 46% on Vietnam, 32% on Taiwan, 24% on Japan and 25% on South Korea. Even some uninhabited islands were hit with tariffs to illustrate how little thought went into this policy.
The markets reacted harshly. On Thursday (Trump waited until markets had closed for the announcement), the S&P 500 fell 4.84% and the NASDAQ fell 5.97%. On Friday, the sell-off continued, the S&P 500 falling 5.97% and the NASDAQ falling 5.82%. YTD, the S&P 500 has lost 13.54% and the NASDAQ has lost 19.15%.
These new tariffs are in addition to the 25% levies on foreign vehicles and auto parts, steel and aluminum, and Canadian and Mexican imports that don't comply with the USMCA that went into effect last month.
Who pays for tariffs? Not the countries whose imports get hit. That would be you and me. Importers pay tariffs, which means the goods we import are going to get a lot more expensive. These tariffs are a tax on Americans.
There will be retaliatory tariffs. The EU is preparing a response. They have even spurred China, Japan and South Korea to join together. Even if this administration reverses course, the damage is done in many ways. Who can trust that Trump won’t reimpose tariffs again in the future? There are also much broader geopolitical consequences that won’t disappear overnight regardless of short-term policy reversals.
Let’s be clear: These tariffs will be economically disastrous. This decision is one of the greatest self-inflicted economic wounds in American history. A Financial Times article aptly referred to it as “America’s astonishing act of self-harm.” Markets are correct to be spooked. Inflation may stick around for longer. A global trade war could further compound economic pain. Goldman Sachs and JPMorgan have both raised the likelihood of a recession.
Clearly, there is reason for alarm as a consumer, participant in the labor market, etc. But what about as an investor?
Here is your sanity check: None of this should have any bearing on your long-term investment plan, especially if you are globally diversified — as you should be. The best thing you can do right now is stay the course.
The U.S. stock market has weathered serious financial and geopolitical crises over its history. The long-term average return of the S&P 500 is about 6% to 7% after inflation. To put things in perspective, consider that this has occurred over a period that includes the Great Depression, World War II, multiple nuclear war close calls, civil unrest, stagflation, an oil crisis, the dot-com bubble, the global financial crisis, a pandemic that has killed millions of people and more.
Take a look at this chart:
I’m not making predictions about the short or medium term. If you have savings goals within the next 10 years, I would be hesitant to put that money into stocks. But looking further out, this is most likely another minor dip on the stock market performance chart in 20 years.
But what if it isn’t? What if the economic effects linger for much longer? What if we experience something like Japan where we have 30 years of flat or negative returns? This is why international diversification is so important. Don’t ignore the rest of the world. The classic investing advice is to never put all your eggs in one basket. This usually means don’t concentrate in a single stock, but it also means you shouldn’t concentrate in a single stock market.
The U.S. has delivered exceptional and reliable outperformance compared to most countries for the past 15 years, but there is no iron law that says this must continue. I wouldn’t want to bet against the U.S. stock market long-term, but I also wouldn’t want it to be 100% of my portfolio. Personally, about 25% to 30% of my portfolio is in international markets, and I think that’s a pretty healthy balance between global diversification and a little bit of home country bias.
The tariffs and the negative consequences they will bring are cause for alarm about the broader economy, but it’s not enough justification to make any rash moves like moving your investments to cash or stopping regular index fund purchases. It’s never a good idea to make investing decisions based on short-term events. If you want your money to grow long-term, you need to put it into risk-on assets like stocks.
If you’re prone to reacting to declining stock market performance, the best thing you can do is stop checking your accounts and stop looking at the stock market. You also won’t learn any actionable information by reading headlines in the financial media. These things only serve to create anxiety and cause investors to make decisions that hurt them financially.
If you do have the cash to invest and you don’t need it for anything short-term, dump it into the stock market. Look at the negative performance as a buying opportunity to buy stocks at cheaper prices. Still, don’t try to time the market. Don’t do anything today that didn’t already make sense yesterday. If you buy $500 worth of index funds every month on a schedule, keep doing that. If you’re trying to build your emergency fund, don’t dump the money into stocks, because you simply can’t predict what is going to happen in the short term. The pain may get even worse from here.
The chaos and uncertainty in the markets brought on by tariffs will pass, even if we have no idea how long the pain will last or how we will get out of this mess. Stocks as long-term investments won’t. If you’re not retiring for another 30 or 40 years, this should not affect your long-term plan. If you are retiring much sooner, you will ideally have plenty of bonds and cash in anticipation of things like this. Keep all this tariff news in perspective. Stay diversified and keep your eyes on your long-term goals.