“Tariff”ied Air and a Trumpster Fire

First off, neither the financial markets nor anyone we know had anything close to this in their 2025 Trump 2.0 playbook and his economic plan.  Yes, the markets were expecting higher uncertainty from the US reciprocal tariffs. The market was pricing in about 10% across the board global tariffs into last Wednesday so called “liberation day”.  The markets had already corrected a quite normal -10% move down on economic slowing that had been ongoing since last July but had slowed more post Xmas in the new year.  But nowhere was any kind of plan like this sniffed out in the markets. Probably because, as a few sources have since reported, the plan itself was still being decided up until 3 hours before the speech.

Initially, the market traded up almost 1% during the first few minutes of his speech as it looked like the 10% tariff level was the news and priced into the financial markets. However, the President kept talking and revealed his data table for all to see. It didn’t take long for the markets to see that Trump’s tariffs were not true tariffs and how they were calculated were not based on any known practice. The bad news is that the tariff announcements were far worse than expected, causing a sharp drop in the market.

The Trump calculation substituted goods trade deficits for tariffs.  It ignored trade in services completely. The formula the Trump team came up with is about trade imbalances with the U.S. rather than reciprocal tariffs.

While the administration hopes tariffs on goods exported to other countries will raise hundreds of billions in revenue annually for the U.S., reducing domestic exports will slow both domestic and global economic growth. Remember, US domestic economic growth was already slowing in the 2h24 in to the November Presidential election as the Biden IRA spending bonanza had peaked in July 2024 along with excess government hiring.  It was already slowing more post XMAS as consumer uncertainty over DOGE government fiscal cutbacks and immigration exportation had risen. Now throw on top of that Trumps Tariff plan being even more anti-growth than the markets had anticipated. And you get the financial markets to crash in a historically unpleasant, but self-inflicted way.

For more detail on the specifics versus standard economic thought and practice on Tariffs here’s a good CNBC article.

We’ve attached a few more links at the end of this video that are good reads on the history of Tariffs as well as ones that provide more data on the current administration plan.

The markets saw the news and then proceeded to tank. Stocks plunged last week as the Trump tariffs were far worse than the worst Wall Street expected. Every market and sector that had gains before last week were wiped out.  The only shining star in portfolios were cash and Treasury bonds, true “safety” assets.  As traders say, in times of stress, correlations of all assets go to 1.

Why? Because almost instantaneously, earnings expectation for 2025, which had already been coming down in standard 1q cuts were now thrown out the window. As Liz Ann Sonders from Charles Schwab noted: “the path of least resistance for earnings is significantly down from here”.  Poof, with the presentation of one spreadsheet by the President, most likely contrived by Peter Navarro, a long-time anti trade academic economist from Harvard, earnings expectations for almost every company in the markets, domestic and foreign collapsed, this at the same time uncertainty skyrocketed.

It was just back in late December that many Wall Street analysts estimated 2025 S&P 500 earnings at around $285 amounting to 12-15% growth from 2024.  I did warn that this looked too optimistic to me as the dollar had rallied in 2h24 into 4q24 which would hit 1h25 earnings. However, at that time many sell side estimates were being raised due to anticipated pro-growth Trump policies of lower taxes and less regulation. Throw that number out the window due to the previously slowing economy and now the Trump tariff chaos.  Even Flat year to year Earnings versus 2024 which would be around $250/share are looking optimistic now and there is a higher chance of a couple quarters of down YTY earnings now in 2025 due to 1^st half uncertainty and a growth stall.

Take a look at the % of sales derived outside the US for a number of different indexes here in the US, per Goldman Sachs:

If you are wondering why technology stocks and Nasdaq collapsed the most post Trumps announcement, look no further than the above table. Large cap Technology is significantly exposed to trade policy risks.  Whether it is foreign government purchases of USA technology goods and services, or foreign manufactured and sourced hardware backed by American designed IP, think DELL and Apple, almost 50% of technology sales are made outside the US.

The Wall Street Journal gave a great example and graphic of the cost of building an Apple iPhone 16, pre and post the new “tariff” plan.  Here’s their great breakdown in one image.  For those of you listening to this video, the summary is the current bill of materials, or cost of goods sold, for an iPhone 16 Pro.  The cost of physical semiconductors, batteries, memory, glass, camera and other things like plastic and display comes to about $550/phone.  The only major physical component manufactured here in the US seems to be memory at about $22/phone or roughly 4% of COGS.

The new system, announced by the President, looks to add almost $300/per phone to Apples material costs. Folks that’s an increase of 54%!  Think about the years measured in decades now and tens of billions of dollars Apple and other tech companies such as Dell have invested in property plant and equipment overseas to keep consumer product costs low and dropping and affordability high.  And poof, out of the blue with the stroke of a pen, a new system, splatter paint economics (check out Navarro’s bio) and short-term chaos.

According to Lance Roberts at RIA, 4^th quarter 2024 S&P500 earnings came in at around $211/ share annualized and the earnings per share trend since around 2014 comes in about 220-$225/ share for 2025.  This takes into account the earnings recession in 2022 as well as the earnings collapse in 2020 in Covid. Of course, interest rates are dropping now so once any forward earnings number is believed, the market can put a higher PE on the number for growth and certainty, opposite its current lower PE and lower EPS estimates.

On Friday, April 4^th, China decided to also play hardball.  The market was also not expecting China to responded with a reciprocal 34% tariff on the U.S. plus export controls on rare earth metals needed for technological production. While this was a smart move on President Xi part to open tariff discussions from a point of strength, it created a follow-on shock to markets.  The only certainty currently is for the market to remain uncertain, in turmoil, and volatile until this issue plays out further.

The economic chaos that is being created globally and in all financial markets by a hastily slapped together “net trade deficit” calculation excel spreadsheet, not a tariff plan, has spiked volatility and uncertainty globally.

What happens from here?  No one knows. On this current path? Earnings estimates for the S&P 500 will be slashed along with revenue and growth forecasts.  Those analysts who were concerned about the lingering inflation in 4q24 and 1q25 seem to have quickly pivoted to the worse effect of dropping unit and real growth that Tariffs present on top of the economic slowdown that was already in place going into late 2024.

Investors, this selloff is truly unprecedented in my investment career as it is man-made by 3-5 individuals in Washington Dc. What happens next or over the remainder of 2025, I don’t know. Does DJT pull back to 10% tariffs like he discussed for months?  Like the financial markets had factored in?  Does he start using a carrot instead of a blunt force stick? I do not know. Time will tell. This is where financial planning rules the day.

I will leave you with some historic data that says this is NOT the time to panic and sell out of your portfolio of stocks, particularly if you are working with a financial advisor and have a long-term financial plan that has been stressed tested for economic downturns, recessions, and hopefully one-off events like this one.

First during Trump’s” Liberation Day” week, the VIX index spike almost 110% in one week making it its third fastest move higher ever, right behind Covid in 2020 and China’s Black Monday in mid-2015.  Charlie Bilello and Creative planning always out with great data showing historic 1yr through 5 years forward returns on VIX spikes like these.

As we’ve tried to message many times over the last 7 years, periods of super high volatility have historically been the time individual investors should be investing, not retreating for the long term. Periods measured in years, adding some to stocks slowly and  walking away, or dollar cost averaging, as your best percentage returns historically have come when putting money into the markets during recessions are other economic downturns such as these.

Here’s a few more data points that point to adding to long term positions.  Put option buying, which is buying insurance or betting on more downside finally spiked to all time highs on Friday April 4^th.

Per data from the CBOE itself, put volume exploded to 42mm contracts and the SP500 move downward in a statistically oversold 4 standard deviations move.

Additional historic return data from sentiment trader and Jay Kaeppel on volatility spikes of the Vix to 45 and forward S&P500 returns.  Ex the GFC in late 2008 and Dot.com bust in 2000, 1 year forward returns averaging over 20%, and yes that includes the Crash of 1987.

No there is not a lot of good economic news out there on the screens right now.  These are definitely the times that are stressful for investors and those cared with managing others savings and financial plans. We are oversold in a 4 standard deviation move lower which no one I know who had been bullish the last 2 year had expected.  Of course this doesn’t mean we can’t go lower, but it does say we are at an extreme level and historically, with equities being long term assets whose returns are measured in years not weeks and months, its been better to add to investments slowly rather than panic and pull the ripcord.

Investors know that regardless of the path for the economy and financial markets in the next few months, the investment team at OHFG will be here manning the ship and adjusting our models and long/short hedged equity fund where we can.

Until next week, have a blessed weekend and know that the OHFG team is doing what we can to plan for you and your families future regardless of what stage you are at in your career or retirement.

https://awealthofcommonsense.com/2025/04/a-short-history-of-tariffs/