Obviously, this has been a very tough week to be an investor.
Trump surprised the markets with a much larger “stick” late Wednesday with tariffs that were much larger than anyone really expected. The methodology of these calculations appears to be rather simplistic math based on a ratio of trade with each country rather than an actual matching of tariffs. He also imposed a baseline tariff of 10% for every country to discourage any “backdoor” attempts to flow trade through other countries. This level of hostility is being described by some as the largest policy error in 95 years, going back to the Smoot-Hawley Tariff Act that the USA put in place that exacerbated the Great Depression. To put it another way, this is the largest “self-inflicted wound” in modern times. So, what is this all about?
Clearly Trump wants to re-order trade to America’s benefit but he has to know that he is not going to get everything in a negotiation and causing a global recession in the process is stupid. I truly believe that this is one massive negotiation where he is intent on having trading partners lower their barriers to US products. Sure, bringing some manufacturing back to America would be a good thing on balance but the wage differential would result in massive inflation in the short term and even the long term. There is a reason why sneakers and iPhones are made in countries with lower wages. I think he is more interested in having non-essential low-value manufacturing done in other countries as Americans really should not be doing those jobs. But high-value manufacturing like semi-conductors, iPhones and autos can eventually relocate more manufacturing to the USA. But this is going to take years not months and, in the meantime, tariffs will result in massive cost inflation which eventually is going to cause too much pain even for his supporters. His true goal is for all countries to eliminate all of their trade barriers and to get their attention, he is beating that drum with a big stick.
On Thursday Trump said none of this was up for negotiation which really spooked markets. But then he pivoted by the end of the day in true Trump “Art of the Deal” fashion to say he is open to discussions. Then this morning he said he had a call with Vietnam about lowering their trade barriers to 0% after imposing one of the highest US tariffs on Vietnam on Wednesday. Other countries like China just shot back in “tit-for-tat” fashion by matching the new tariff. This is a very public and very messy negotiation and it is going to take time as each country realizes he means business. But in my opinion that is days and weeks not months and years.
We know markets do not like confusion and uncertainty and have a hard time pricing in chaos. But markets have not been this oversold since the pandemic when there was NO path forward and economies were literally being mothballed. That makes no sense to me. This is a negotiation (or perhaps a game of chicken is a better way to describe things). It can all be reversed as quickly as it started if countries “bend the knee”.
I really do believe that Trump cares a lot about the stock market even though he claims not to. Who cares about money more than him? He knows that when the wealth effect reverses course, spending very quickly falls off a cliff and growth stalls. And he doesn’t want to lose control next year during the mid-term elections which he has to be thinking about. So, at some point once he can claim victory (real or not) he will soften his stance. Can you imagine how many of his rich friends are complaining to him about how much money they have lost in the last month? And how about all of the tech billionaires who attended his inauguration that have lost billions on paper? I am sure their donations bought access and they are expressing their views on a daily basis.
We are monitoring these developments closely and looking for opportunities in the sell-off but in typical fashion, we will not be early. I have learned from prior market disfunctions that things can get dislocated and opportunities of a lifetime can appear. So we are not adding yet and have actually been looking to trim holdings that have been weathering this really well because before it is over, nothing is left unscathed.
know this is very unsettling. But I also know that selling great companies in times of market panic is not a strategy for long-term wealth creation. Yes, there will be some that believe they can sell low and buy lower but that has a very low winning probability. When things are lower will the news be better or worse? When markets have had enough and successfully pushed out enough of the weak hands, they tend to bounce very quickly and don’t let anyone back in. The best defense is to appreciate that nobody can time the market and we have to take the down periods to get the good periods and we stored up a lot of excess performance over the last 2 years. We will get to a point (sooner than later in my estimation) when Trump will offer carrots instead of sticks.
Lastly, please find below two podcasts from our RBC experts providing further insight on the tariffs:
Eric Lascelles (Chief Economist) - Canada under tariffs: Analyzing trade and economic implications
Eric Lascelles evaluates the latest tariff changes and their impact on financial markets, with particular focus on Canada, noting that Canada's evasion of extreme tariffs could potentially boost its appeal to investors. He underscores the economic climate's unpredictability and stresses the importance of remaining focused and informed in these times. [20 minutes, 1 second] (Recorded: April 3, 2025)
Stu Kedwell examines the repercussions of new U.S. tariffs on financial markets, noting the potential for reduced global economic growth and its effects on commodities. Stu also underscores the importance of active management and being prepared to adjust and rebalance portfolios in response to the evolving economic landscape. [20 minutes, 43 seconds] (Recorded: April 3, 2025)
As always, call if you need some hand-holding.
Derrick