Volatility and Tariffs

​It’s now March 10, 2025 and anyone watching the markets and their accounts are either starting to get nervous or have been for a little while.  The Trump Administration has added tariffs to Europe, China, Canada and Mexico.  It has also pushed back tariffs by a month and had (a few) carve outs.  But the messaging hasn’t changed from President Trump – tariffs are good for America.  This is the second blog I have written on tariffs this year, and Brandon and I have also done a podcast on them.  Yet for all the talk and fear, there is still no clarity about what the effects of this round of tariffs will be.  This is because there is no clarity regarding the goals of the tariffs.  Here are 4 possible scenarios that I see in the coming months.  These are taken from an email I sent to a client who was asking about the market volatility and tariffs.
 
Scenarios:

1. There is no real plan from this Administration, just a desire for a showing of strength to bring jobs and manufacturing back to the US.  If this is the case, there will be pain in the short term as tariffs are not viewed by the Administration as a bargaining chip but instead a means to force companies to do its bidding.  This will cause massive disruption in the economies of both the US and our trade partners.  This will also cause both Republican and Democratic elected officials to put severe pressure on Trump to change tactics since many of the manufacturing companies couldn’t adjust their production and workforce in any sort of a short term.  How does this end?  I don’t know, but the politics would be brutal for all involved.  In this scenario, you would want to be invested in high quality companies that are not heavily dependent on international trade.  You would want to be invested in companies that are already producing a large % of products domestically. 
2. The tariffs are designed to create short term pressure on Canada and Mexico, while putting more severe pressure on China and the European Union (both of which have significant tariffs against US goods and have for decades).  In this scenario, Canada and Mexico would have to adjust significantly faster than the US because we are the largest market for their exports.  While there are significant issues where goods cross the borders multiple times prior to final sales (cars), the tariffs would hit the economies of those trade partners sooner and deeper than retaliatory tariffs would the US.  The long-term effect on Europe and China is unknowable right now, but again we are the largest consumer of Chinese goods and their economy is hurting far more than ours at present.  In this case you would want to be invested the same way as Scenario 1 but be ready to shift into some companies and sectors that could see a short-term drop but a quick rebound.  We are ready for this.
3. There doesn’t seem to be any economic plan for the short/long term and the market responds by dropping 20%+ and the analysts and talking heads are screaming about the next “market crash.”  This scenario is an emotion-based situation that I can easily see happening.  However, the fears about the market “crashing” don’t scare me because the fundamentals don’t back it up.  The tariffs are not something I am in favor of, but they are also not crippling enough to damage North America’s economy to the point of a market crash.  Most companies that will be affected have already been dealing with tariffs since Trump’s first term (Biden never reduced those tariffs) and have the ability to respond – maybe not quickly enough to stave off a drop in stock price, but they won’t go out of business either.  An example of this situation is NVDA.  Two weeks ago, NVDA beat analysts’ earnings expectations (and they were extremely high) and the stock still dropped double digits.  But NVDA’s earnings proved that there is not a doomsday coming for the company, which could indicate a buying opportunity.  In this scenario you would want to be invested like in Scenario 2.
4. The tariffs and retaliatory tariffs create an immediate sit down with leaders of our trade partners where they swiftly come to agreements on how to move forward.  The short-term drop in the market is quickly changed to upward momentum – not for every company or sector but for those areas that are not going to be as negatively affected.  This is exactly what happened during the first Trump term.  In this case you would want to be ready to buy specific companies who’s share price dropped but will benefit from the lack of a trade war.  We are ready for this.

 
The bottom line is that while we are not enjoying the market volatility and the potential for a large disruption in the economy, we are ready to adjust to the market each week and month.  We don’t allow politics to determine investment policies, but we are very aware of the impact it has on our clients.  We want to make sure we help ease fears while not creating new ones.
 
 
Written by Sean Budlong, CFP®, AAMS, Chief Executive Officer, Majestic Financial, Financial Consultant, RJFS
 
*Disclosures: Any opinions are those of Sean Budlong and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.