“The big money is not in the buying and selling, but in the waiting.”
-Charlie Munger
Here’s what you need to know this week:
· Stocks drop as tariffs are enacted
· Market declines are part of the process
· “The Trump Put” may backstop a steep decline
Tariff Turbulence
Stocks have sold off strongly over the past week as President Trump implemented his tariff plan. Trump reiterated his commitment to them on Monday and they officially took effect on Tuesday. Trump’s plan places a blanket tariff of 25% on all Canadian and Mexican imports (with a carveout of just 10% for Canadian energy) while also doubling the blanket tariff on Chinese imports from 10% to 20%[1].
Market reaction was swift and negative. The S&P 500 has been slowly declining since reaching its all-time high of 6,147 back on February 19th, but the selloff ramped up this week and the S&P now sits nearly 6% below its all-time high. The Dow Jones and NASDAQ indices suffered similar losses.
Additionally, the Federal Reserve Bank of Atlanta’s newest GDP (measure of economic activity in the US) forecast shows a decline of 2.8% which would be a sharp reversal of last quarter’s 2.3% gain:
This implies a sharp economic contraction unless material conditions change. In fact, the official definition of a recession is two consecutive quarters of negative GDP growth.
China, Canada and Mexico did not take these new tariffs lying down. China has already responded with a 15% tariff on American agricultural products, while Canada has imposed a sweeping package of tariffs on a wide range of US exports. Mexico took a slightly more measured approach, saying they have a tariff package ready to go but will not implement them until Sunday and would like to negotiate with Trump first[2]. Trump and his team claim to have a second round of tariffs ready to punish the retaliatory tariffs. Some people fear that this may spiral into an all-out trade war, but other analysts have a more optimistic view on the situation. But first, let’s take a quick look at history to put this decline into context.
The Price of Admission
First, let’s discuss the market decline. Obviously no one likes to see their stocks go down, but market volatility is an unavoidable part of the journey. To quote Ben Carlson, “Volatility is the price of admission when it comes to investing in stocks”. These kinds of drawdowns are not unusual; in fact, stocks experience a five percent decline roughly 3.4 times per year on average:
You can see on this chart that we also average a 10% decline at least once per year, with even heavier drawdowns coming every two to four years. Even with these declines, the stock market has averaged a 10.06% annualized return over the past one hundred years[3]. Like the quote says up top, the big money is not in the buying and selling but in the waiting.
“The Trump Put”
As we’ve discussed the past few weeks, many economic and political analysts are torn as to whether Trump’s tariff plan is intended to be a long-term policy or a bargaining tool to bring other countries to the negotiating table. Even Tuesday’s implementation could be part of a bargaining strategy; after all, the other side has to believe your threat is credible in order for it to have an effect. There are early signs this may be the case: Chinese President Xi Jinping, Mexican President Claudia Shinebaum and Canadian Prime Minister Justin Trudeau all have negotiations scheduled for later today. Additionally, US Commerce Secretary Howard Lutnick said in an interview that President Trump is already weighing relief on certain tariffs in exchange for concessions[4].
Markets responded positively and rose to start this morning, although things are moving fast and may change by the time you read this. There is another reason many investors remain optimistic and it is colloquially known as “The Trump Put”.
President Trump initiated a similar, though smaller in scale, trade war back in 2018. The whole point of the tariffs is to cause more economic damage to other countries than to ourselves in order to gain more favorable trade conditions. Many economic indicators work on a lag and it is impossible to ascertain the impact of the tariffs in real time. However, the stock market is open every weekday and large investors and analysts are constantly pricing in the effects of tariffs.
The thinking behind “The Trump Put” is that President Trump uses the stock market as a shorthand gauge for the impact of tariffs on our own economy and will not allow too much damage from his tariff policies. We saw this in 2018: when stocks fell between 5-10% Trump would meet with adversaries to make common ground and lift the tariffs. Similar to options traders who use a put option to limit their downside losses, many investors think Trump will step in if the decline steepens. The exact level of this “put option” is up for debate though, and he will still likely want certain concessions from our trade partners. As always, the best investment plan is to tune out frantic headlines and stay focused on your long-term goals.
What Else
· President Trump gave his first Joint Address to Congress last night
· Israel and Hamas continue to debate terms of a sustained ceasefire
· Ukrainian President Volodymyr Zelenskyy has offered terms to end the war with Russia after a testy meeting with President Trump and Vice President Vance
· Pope Francis has stabilized after two bouts of respiratory failure
· LeBron James became the first player in NBA history to score 50,000 career points
What We’re Reading
The eruption of Mount Vesuvius and the subsequent destruction of Pompeii is among the most famous disasters in recorded history, but scholars have long debated the actual date of the calamity. Two new studies have reignited the debate; click below to read the arguments as well as see some photos of the aftermath of the eruption:
What’s Happening Downtown
The Myriad Gardens is debuting The Way of Flowers – Orchid Ikebana this Saturday, March 8th. This event will feature orchids arranged in the Japanese art of flower arrangement know as “ikebana”. The event will take place inside the Crystal Bridge Conservatory and will run through April 6th. Click below to learn more:
· https://myriadgardens.org/events/orchid-show/?mc_cid=e4407ed906&mc_eid=71bf387036
To read more from our blog, click here
Written by: Kane Ogle, CFP®
Steve Beck, Kane Ogle, CFP®, Amber Eduvigen, CFP®, Cale Olbert, CFP®, Brett Valentine, Brandon Ingerson, Jenni Hess
Sources: [1] Bloomberg [2] Bloomberg [3] Investopedia [4] Bloomberg