Staying The Course Amid Tariff Headlines

Tariffs, essentially taxes on imported goods, can increase operational costs for businesses and lead to marginally higher consumer prices. While their purpose may be to promote domestic industry, they can also disrupt global trade patterns and introduce short-term friction into supply chains. However, the broader macroeconomic effects of tariffs are often diluted across the economy and typically do not to result in prolonged structural weakness. However, the current crisis may or may not follow historical precedent.

By way of background, tariffs have:

▪ Triggered short-term volatility, particularly in sectors with significant exposure to foreign supply chains.

▪ Had minimal enduring impact on major equity indices like the S&P 500, which tend to normalize once uncertainty fades.

▪ Been effectively counteracted by monetary and fiscal policy measures, including interest rate cuts, fiscal stimulus, or  targeted liquidity provisions by central banks.

For example, during the height of the 2018–2019 U.S.-China trade tensions, tariffs were escalated, and retaliatory measures ensued. Despite the noise, the S&P 500 ended 2019 up by 28%, supported by the Federal Reserve’s accommodative stance and strong corporate earnings from resilient sectors. Tariffs, in essence, have tended to act more as short-term catalysts for volatility than as long-term drags on market performance.

This time, however, the global economy was already decelerating before these announcements, and the tariffs could accelerate the decline and drive the global economy into a recession. In our opinion, the more significant risk would be a systemic credit or liquidity crisis. While we do see signs of stress in the markets, they have not risen to crisis level which is what we, and the central banks, are closely monitoring at this time.

Potential Spillovers

Although we maintain a cautious outlook, we also recognize the heightened risk of economic deceleration resulting from a combination of factors: rising interest rates, uneven global growth, constrained liquidity, and evolving trade policy. Tariffs, especially when implemented on a broad scale or without multilateral coordination, can lead to unintended economic

Consequences:

▪ Retaliatory tariffs by trade partners, potentially escalating into full trade conflicts.

▪ Profit margin pressures for firms that rely on foreign inputs, potentially leading to reduced capital investment.

▪ Reduced consumer spending, particularly if inflation is exacerbated by higher import prices.

▪ Anti-Americanism, where consumers in other countries substitute US products and services for others in protest.

There are substantial risks associated with unilateral actions that take the market and trading partners by surprise. The direction of this market will depend upon whether trading partners are willing to negotiate or to try to resist a more balanced trade structure.

Portfolio Diversification

Our investment approach is based on proper diversification, which is a proven method for mitigating exposure to individual risk events such as trade policy changes. By building portfolios that include a variety of asset classes, sectors, and geographies, we aim to smooth performance across different economic conditions.

▪ Allocations to higher quality companies, help reduce sensitivity to international trade disruptions.

▪ Defensive sectors like healthcare, utilities, and consumer staples often remain stable even in turbulent policy environments.

▪ Higher quality fixed income holdings, including investment-grade bonds, offer important downside protection and income

during periods of market volatility.

In short, diversification allows your portfolio to remain resilient, even when isolated sectors or trade routes experience stress.

Strategic Discipline

Reacting to headlines, particularly in moments of elevated uncertainty, often leads investors to make impulsive decisions that compromise long-term performance. Numerous academic studies confirm that market timing strategies —especially during volatile periods where recovery can be swift – end up harming investors rather than helping them.

Rather than reacting to the potential imposition of tariffs, we focus on the structural soundness of your portfolios. The right question is not “Will tariffs be enacted?” but “Is my investment approach designed to endure policy volatility and adapt to macroeconomic evolution?”.

Our team made adjustments to many of our portfolios over the last several weeks, including moving to higher credit quality on bonds, staying neutral on market weights, allocating to higher quality stocks, and ensuring proper diversification. In periods of uncertainty, the markets typically have a flight toward quality and we have already migrated portfolios in that direction.

Continuous Monitoring

Our investment team is meeting frequently and monitoring the situation. The key areas of current focus include:

▪ The trajectory of proposed tariffs and corresponding trade policy negotiations.

▪ Microeconomic indicators within tariff-sensitive sectors such as semiconductors, automobiles, and consumer goods.

▪ Federal Reserve policy guidance, inflation trends, and credit conditions, which all interact with trade policy outcomes.

▪ International response frameworks, including the actions of global trading blocs like the EU, WTO mediation, and diplomatic negotiations.

We will continue to make portfolio adjustments as conditions warrant.

Communication

If you have questions about market conditions, your portfolio, or any concerns about upcoming policy changes, we are here to engage with clarity and perspective.

Warm regards,

THE PENSION & WEALTH MANAGEMENT TEAM

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