By Dr. Jim Dahle, WCI FounderUpon returning home from Grand Cayman, where I was speaking to anesthesiologists (and diving), I received a message from Josh, our content director, about the new Trump administration tariffs:
“I'm seeing some talk on Reddit and the FB group about what people should do with their portfolios regarding the new tariffs. People are worried. It might be worth doing a quick post on it that we can publish ASAP if you’re up for it and you think you have something meaningful to say. Even if it is just ‘Stay the course.' Might be reassuring to some of our readers.”
OK, I told him. We can do that. So, here it is.
The truth is that I have no idea what the short- and long-term ramifications of the Trump administration's tariff policies are on your portfolio. As a student of history and markets, I have spent the week or two since the inauguration watching with a mix of fascination and dread. “I wonder if that will help or hurt,” I say to myself every time something new comes up.
What Is a Tariff?
Let's talk about tariffs for a minute. What is a tariff? A tariff is a tax. But instead of the tax being initiated by you earning income (an income tax), it is initiated by the import of a product (or perhaps service) from another country. These are not exactly new. For many decades after US independence, the government was funded primarily by tariffs. The income tax didn't even show up until the Civil War. The rates then were 3%-5%. The public didn't like it, so after the Civil War, 90% of all tax revenue came from alcohol and tobacco. The income tax went away in 1872 and then came back in 1894, and it was then ruled unconstitutional in 1895. In 1913, the 16th Amendment was ratified, Form 1040 was born, and income tax rates were 1%-6%.
The message to take from all of that early history is that the US government didn't used to be all that big. It didn't do all that much. It couldn't. It didn't have the money to do it. And when the government doesn't do much, it can fund those activities with nothing but a few tariffs. When the government does a lot (and yes, our government now does a lot), you're either going to need A LOT of tariffs or other taxes in addition to the original tariffs.
What Are the Positive Economic Effects of Tariffs?
There are two points to a tariff. The first is to raise money. We pretty much covered that above. The second point is to protect someone inside your country offering the same product or service or to incentivize people in your country to provide more of that product or service. Basically, you're giving your folks an advantage. The positives of a tariff are obvious, right? More revenue for the government without taxing the citizens and more income and better jobs for the citizenry instead of people in other countries.
What Are the Negative Economic Effects of Tariffs?
So, what's the problem? Why don't we already have huge tariffs if they're so awesome? Well, the first law of economics is that people respond to incentives. Subsidize what you want to see more of and tax what you want to see less. If you're going to tax imports, expect to see fewer imports. What's the problem with that? Well, we import an awful lot of stuff. Part of the reason you can buy so many things with so little money is because they are made elsewhere—in places where the product inputs and labor it takes to create those items are a lot cheaper. Places like China, Korea, Malaysia, Indonesia, and Mexico.
Malaysia just raised its monthly minimum wage to $378. Divide that by 160 hours a month, and that's $2 an hour or so. Or you can pay $16.50 in California. It's your choice as an employer/business owner. If you like a business that has positive profit, you're going to make your product in Malaysia instead of California if you can. So, they do, and a big part of that savings is passed on to you, the consumer, in the form of cheaper prices.
Now, if your country adds a tariff on those products coming from Malaysia, they're going to cost more. Who is going to pay that cost? That's right, you are. Yes, your government gets more money, but that money is coming from you—just like your income taxes. No free lunch.
But wait, there's more. Economic theory suggests that tariffs make us all worse off. Free markets create more wealth. The distribution of that wealth may not be as even as you might like, but there's probably going to be a bigger pie to divide up. Tariffs aren't usually one-sided either. If one country puts them in place, so do the other countries with which they trade. This is sometimes called a “trade war.” Not only do you pay more for your products made elsewhere, but there is less demand for your products made here. Not awesome.
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Why Is the Trump Administration Imposing Tariffs?
The “why” behind the tariffs is not entirely clear to me, but we can glean some insight from the president's social media posts, such as this one:
“WILL THERE BE SOME PAIN? YES, MAYBE (AND MAYBE NOT!) BUT WE WILL MAKE AMERICA GREAT AGAIN, AND IT WILL ALL BE WORTH THE PRICE THAT MUST BE PAID.”
OK, Trump seems to recognize there are some downsides to tariffs but thinks they are worth it for the upsides. What upsides is he most interested in? Apparently NOT protecting American industry or boosting revenue. It's reportedly about getting our neighbors to do more about immigration and drugs. In one of the executive orders, it says the following:
IMPOSING DUTIES TO ADDRESS THE FLOW OF ILLICIT DRUGS ACROSS OUR NORTHERN BORDER
I, DONALD J. TRUMP, President of the United States of America, find that the sustained influx of illicit opioids and other drugs has profound consequences on our Nation, endangering lives and putting a severe strain on our healthcare system, public services, and communities.This challenge threatens the fabric of our society. Gang members, smugglers, human traffickers, and illicit drugs of all kinds have poured across our borders and into our communities. Canada has played a central role in these challenges, including by failing to devote sufficient attention and resources or meaningfully coordinate with United States law enforcement partners to effectively stem the tide of illicit drugs . . .
I previously declared a national emergency with respect to the grave threat to the United States posed by the influx of illegal aliens and illicit drugs into the United States in Proclamation 10886 of January 20, 2025 (Declaring a National Emergency at the Southern Border). Pursuant to the NEA, I hereby expand the scope of the national emergency declared in that Proclamation to cover the threat to the safety and security of Americans, including the public health crisis of deaths due to the use of fentanyl and other illicit drugs, and the failure of Canada to do more to arrest, seize, detain, or otherwise intercept DTOs, other drug and human traffickers, criminals at large, and drugs. In addition, this failure to act on the part of Canada constitutes an unusual and extraordinary threat, which has its source in substantial part outside the United States, to the national security and foreign policy of the United States. I hereby declare and reiterate a national emergency under the NEA and IEEPA to deal with that threat. This national emergency requires decisive and immediate action, and I have decided to impose, consistent with law, ad valorem tariffs on articles that are products of Canada set forth in this order . . .
(d) Should Canada retaliate against the United States in response to this action through import duties on United States exports to Canada or similar measures, the President may increase or expand in scope the duties imposed under this order to ensure the efficacy of this action.”
I guess we're causing Canadians and Americans to have economic pain to try to force Canada to curb the flow of drugs and human trafficking victims across our northern border. Like I said, it's pretty interesting stuff to watch. Other statements suggest Trump believes that we are subsidizing Canada by running a trade imbalance with them. Or maybe we just want Canadian stuff more than Canadians want our stuff. Dunno.
It's all a little vague and ambiguous, but it appears the administration's tariff goals appear to be:
- Control immigration better
- Control importation of drug and drug precursor material
- Ensure the US is treated fairly by its trading partners
- Pressure other countries to assist with US foreign policy goals.
Will the tariffs help? Will the benefits be worth the pain? I have no idea. The crystal ball is cloudy. Reasonable people can disagree.
What Do the Tariffs Mean for Your Portfolio?
Tariffs are generally bad for the economy. They lower production and raise prices, boosting inflation. If there is an effect on your portfolio, it is likely a negative one—especially if your portfolio is globally diversified like mine. Like any policy change, there will be winners and losers. Some companies and sectors will benefit from the protection that tariffs provide. Others will be hurt. But it's not easy to say whether the US or the international stocks in your portfolio will be hurt more. And it's impossible to say whether the return on stocks will be positive or negative this year—or even over the next five years. There are so many other factors that are known, unknown, and unknowable that go into this equation that you cannot make an accurate forecast based only on these new tariffs. That doesn't stop people from trying, of course.
Goldman Sachs gets paid to make predictions. According to Morningstar, Goldman is making all kinds of them with these new Trump tariffs. They're all pretty vague, though, as they should be if you're in the prediction business. More from Morningstar:
“‘If company managements decide to absorb the higher input costs, then profit margins would be squeezed. If companies pass along the higher costs to its end customers, then sales volumes may suffer,' says the Wall Street bank. They estimate that every 5% point increase in the U.S tariff rate would trim S&P 500 earnings per share by roughly 1%-2%.
‘As a result, if sustained, the tariffs announced this weekend would reduce our S&P 500 EPS forecasts by roughly 2%-3%, not taking into account any additional impact from major financial conditions tightening or a larger-than-expected effect of policy uncertainty on corporate or consumer behavior,' says Goldman. (It should be noted that the bank's economists still think that the tariffs on Mexico and Canada will be temporary).
Another way equities may be pressured is that investor anxiety could weigh on stock valuation multiples. The chart below shows the spike in the economic policy uncertainty index, registering a top percentile reading for the last 40 years, Goldman notes.
‘The historical relationship between policy uncertainty and the S&P 500 equity risk premium suggests that the recent uncertainty increase should reduce the forward 12-month P/E multiple by about 3%, holding all else constant,' says Goldman. Remember, the S&P 500's forward P/E multiple is currently around 22, well above its historic average in the high teens.”
[EDITOR'S NOTE: On February 3, the US and Mexico and then the US and Canada both announced the imposed tariffs on each other would be delayed until March. Tariffs on China, however, had still been imposed.]
It appears that the people at Goldman have the same thoughts on this that I (and pretty much everyone else) do. The tariffs will have a negative effect on the economy and your stock performance. How large of an effect is hard to say, but that doesn't keep Goldman from saying it (1%-2% earnings drop per 5% of the tariff). That means 25% tariffs are going to decrease S&P 500 earnings by 10%. All else equal, it reduces stock value by 5%-10%, at least while tariffs are in place. And we have no idea how long that will be. See what I mean? It's not very actionable information.
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What Should You Do About Trump Tariffs?
Jack Bogle famously said:
“Stay the course. No matter what happens, stick to your program. I've said ‘Stay the course' a thousand times, and I meant it every time. It is the most important single piece of investment wisdom I can give to you.”
“We say stay the course. But before you stay the course, make sure you're on the right course.”
“Stay the course. Regardless of what happens in the markets, stick to your investment program. Changing your strategy at the wrong time can be the single most devastating mistake you can make as an investor.”
You are not investing your retirement money to spend next week, next month, or even next year. Chances are you're going to spend the majority AFTER Donald Trump is out of office. You, like me, have no idea what tariff levels will be 25 years from now. Why would you think that they should have any effect on how you invest today? That doesn't make any sense. If you thought having 40% of your money in US stocks and 25% of your money in international stocks was the right thing to do a year ago, that's probably still the right thing for you to do today.
Try to adopt a more philosophical attitude toward your portfolio. If prices go up, you're wealthier. If prices go down, future returns are likely higher (as a percentage) and you can buy more shares at a lower price. You win either way. We are not changing our asset allocation, and we recommend you don't either.
What do you think? Are you making any portfolio changes due to these new tariffs? Why or why not? What does your crystal ball say tariffs are going to do to stock prices, interest rates, and inflation over the next year or two?
We have been racking up debt ($36T) at an extraordinary rate, and “trade imbalances” are one of the reasons.
But politicians don’t like to hit the debt issue head-on for reasons of not wanting to be the pot calling the kettle black.
Better policing of fentanyl and immigration at the border is an emotionally charged (and legally practical) way to start some very uncomfortable (but necessary) conversations.
What better way than announcing new tariffs to shock everyone into action?
It’s actually quite clever, IMHO.
Now will it be disruptive to the market to have these conversations?
Of course it will, but what’s the alternative?
One (of many alternatives) is not to place a tariff on Canada for fentanyl, since statistically almost none of it enters the country from there. It is a made up problem. Luckily since it is a made up problem, the solutions are easy. Create a fentanyl Czar in Canada! Done! Trump gets to claim victory for a problem that didn’t exist. Be on the look out for many more quite clever solutions to problems that aren’t there in near future.
In meantime, our credibility as a trading partner takes a hit. Small price to pay for cracking down on the non existent fentanyl Canadian problem being solved!
Perhaps true, but would you rather the conversation be about “making the rich (e.g. W2 doctors) pay their fair share” or Tariffs….?
Reducing trade imbalances or “being nice” to other nations…?
Paying down our debt or adding trillions more in give-away programs….?
Spending like drunken sailors or DOGE….?
etc, etc…..
I merely was answering your question of “but what’s the alternative?” Many is the answer. Some are better and some are worse. Tariffs (or the threat of them) possibly have a role at times. Most things in life are not zero sum games.
Agree with the post’s original direction of staying the course with investing. Thanks for posting.
Please explain how trade imbalances have anything to do with the federal deficit and federal debt. The latter are caused by the federal government spending more than it takes in, while the former are caused by people and companies buying more from other countries than we sell to them.
Too soon after the unnecessary near global economic collapse to discuss those tariffs again?
Yeah, I don’t think anyone will have an appetite for tariffs after losing 20% of their retirement to three days of stupidity.
Some observations. Argument for diversification. The cheap oversea goods come at a large cost to the environment and humanity. Lax laws in foreign countries = larger profits and cheaper goods, but obviously at a big cost in other ways. Has Covid not taught us anything? Supply chain issues. Even more recently the saline shortage, even right here in the good old USA. We need to be less reliant on outside sources. If the tariffs make us more independent, I see that as a good thing for self reliance. I know we have a world economy, but maybe that is not the best model. What tariffs are imposed on our exports already? I don’t know but it matters. Tariffs seem like a form of consumption tax, which, when added to income tax and sales tax is going to hurt the consumer. For portfolio changes, carry on as normal, unless you are 100% US equities. Then you might want to change things up a little at least.
I’m staying the course since most of my portfolio won’t be used for many years. Taxable is in cash right now due to expected self-inflicted volatility in US markets.
Re: justification for tariffs. He doesn’t even know. It’s chaos, showmanship, and “disruption” for its own sake. Even the Cato Institute came out with a paper on the American fentanyl trade being carried out almost exclusively by US citizens for US citizens.
Your first two sentences seem to say opposite things.
You’re right. I should have specified that we use taxable for shorter term expenses which is separate from retirement funds.
Written in James Madison’s hand, in 1780, John Jay (US Minister to Spain) was instructed to assure the Spanish that the new Republic (still fighting for independence) wanted free trade. This changed with the Tariff Act of 1789. Until the recent era, as the yin/yang, as tariffs came and went, their purpose was to promote trade, increase revenue and to promote American industry. The Trump Tariff’s reflect a new use of them and its unknown how this will play out. Having an investment policy and sticking to it is all one can do while tuning out the noise.
“You are not investing your retirement money to spend next week, next month, or even next year.”
Actually, we are investing our retirement money to spend next year – we’ve had the date all picked out for a few years now! We have been making some changes over the past few years with that date in mind and obviously not because of the upcoming uncertainty.
The question then is, of course, does the upcoming uncertainty change how we should be investing? Or do we stay the course and treat any market changes as we might based on our planning for mitigating sequence of return risk? Right now that’s the plan but definitely interested in the feedback from the WCI commentariat
So you’re going to spend all your retirement money in your first year retired? That seems unlikely. Some of that money you won’t spend for 10, 20, 30 or more years.
No. Stay the course with your reasonable plan. (If you don’t have a reasonable plan of course you need to get one.)
I would also think, as an additional reason to not worry as much, with your transition into retirement you are likely doing some form of a bond tent, or a buckets strategy approach, or some variation of a large shift out of equities (if you haven’t started already), and since most of the concern regarding potential increased market volatility is likely to focus on the equity side (domestic versus abroad versus both), and less so on fixed-income components, that this should be less of an issue for you.
This was a great concise summary of tariffs! For those who want to get into the weeds a bit more, I just finished writing this: https://clearthinkingonhealthcare.com/2025/02/07/why-tariffs-are-bad-and-when-they-can-sometimes-be-good/
The extra details I share don’t change any of the investing wisdom WCI gives here, but at least having a few more details can better equip you to evaluate the impact of tariffs on economies, which can de-fog the crystal ball a little bit, particularly with regard to international investments.
For years there has been a fairly vocal minority on the “right” who clamor for a national sales tax or value added tax in an effort to shift more of the tax burden from the more wealthy to the less wealthy in an apparent effort to “widen the base” for tax collections. Perhaps a reason for this current interest in tariffs is to create a sort of back door national sales tax with exceptions for domestically manufactured goods (minus of course any imported raw material costs). That could explain how some of these tariff proposals don’t come as part of a rational negotiation. The intent might be to make them stick.
Interesting possibility but given the populist focus of the right at the moment not sure widening the base is a big priority. Feels like that was the old Republican party a la Mitt Romney’s comment about 47% of taxpayers not paying anything at all.
I’m with you & Bogle for the longer term and retirement savings. But here’s a more relevant question… how about 529 portfolios for kids going to college in the next 1-5 years? Any thoughts on how aggressive (not) to be? I think we can agree that there’s a decent chance of a lot of volatility given rapid fire tweet’s (or X’s or whatever we call them know). Is it time to just go very conservative? Of course there’s no right answer but i welcome your insight.
You have to consider both the likelihood of risk showing up AND the consequences. The consequences of risk showing up in our 529s are nearly zero since we could cash flow college (and # 2 just got a full tuition scholarship to her first choice yesterday, not surprising given her grades.) So we have invested VERY aggressively as discussed here.
https://www.whitecoatinvestor.com/3-reasons-why-you-can-take-more-risk-with-a-529/
Would have been better to have put it all in US large caps of course, but no regrets about our 35 100% stock 529s. I think between my kid and their cousins there are 8 or 9 withdrawing from them right now and I would say only one got burned by risk showing up. He withdrew most of his 529 in late 2022.
As far as what the markets are going to do in the next 1-5 years, my crystal ball is cloudy. Consider the consequences of it showing up and if they are severe, even 100% cash now wouldn’t be crazy.
I have a question similar to some of the “short term” questions above. My family just sold our house for a considerable gain and are renting for now. Our plan was to invest that gain from selling our house for a down payment Spring of 2026, but the current situation gives us hesitation to do so. We have the money in a High Yield Savings account with a 3.7% return. We’d like to have a higher return obviously, but certainly don’t want to lose any of that over the course of this next year.
Well, you could get it a little higher in a money market fund.
https://investor.vanguard.com/investment-products/mutual-funds/profile/vmfxx
4.26% right now.
Maybe you could find a HYSA paying a little more, but the Vanguard MMFs will always come out near the top in this sort of a comparison of safe cash investments.
Are high tariffs by various leading nations against each other (“tariff wars”) historically associated with bad economic times? Causality of worldwide recessions or depressions?
Do some historians believe that the Great Depression that started around 1930 was worsened or prolonged by high tariff walls between the USA and European nations ?
I believe they are but don’t have the specific data you may be looking for.
Been talking to my financial advisor who has my 401k and roth portfolios rolled over from my previous job, plus some inheritance I got last year. After the election, I’ve had like 6 or 7 conversations with him about my concern about the markets, given that I turn 63 this month. I’m now stuck $100k in the last 75 days, bc I believed his “trust me bro, we’re ready for this”. I moved my HSA investments out to bonds last week, but forgot to do it with my new 401k/new job, but it’s so small comparitively. I guess I’m gonna have to ride this out a bit, but I think I’ll be looking for a new advisor. Very disappointed that he just *didn’t* listen.
Is your plan to somehow time the market effectively each year as you go forward? Are you aware how challenging that is long term?
Also, the purpose of a good advisor isn’t to beat the market. It’s to make sure you have a reasonable plan, help you stick with it, and do the chores of investing for you.
I’d been listening to folks as early as May 2023 talking about what the kinds of tariffs Trump was talking about would do to the economy and the market. In general, I let my guy do his work (though I did request him not to include TLSA or UHC in my funds when I found them there).
I knew this was going to happen. Short of flat telling him to take me out of the market, I don’t know why he didn’t hear my concerns. I mean, Trump f’ing telegraphed it. I know timing the market is generally a fallacy, but I don’t think this was the case.
# 1 If you don’t like how an “advisor” manages your money, manage it yourself. That’s what many of us here do, even if we don’t try to time the market any more than your advisor does.
# 2 Before making a habit of timing the market, I would suggest writing down your very specific predictions in a little notebook for a year or two. I suspect within that time period you will discover your ability to predict the future is not good enough to be profitable. If that is not the case, you should be managing far more money than your own.
Is one course of action to spend on big-ticket imported items likely to increase in price? Such as cars, large appliances, anything else? Already seeing some prices increase and less competition and supply leading to more price increases. But there are also products made in the USA for export that may become cheaper with higher supply here if they are no longer exported? Example: BMW X series SUV’s
Also US dollar and treasuries getting hammered.
Is one course of action to spend on big-ticket imported items likely to increase in price? Such as cars, large appliances, anything else? Already seeing some prices increase and less competition and supply leading to more price increases. But there are also products made in the USA for export that may become cheaper with higher supply here if they are no longer exported? Example: BMW X series SUV’s
Also US dollar and treasuries getting hammered.
We get a pretty decent amount of spam, though tons of it gets caught up in our filters before it hits the page. Some of it gets through, though, and there are a couple of us who are on the lookout for it every day. But yeah, if the comment sounds scammy or like it’s written by AI and the link they provide goes to some random site, I wouldn’t give out any information either. Hopefully, it’ll be deleted before too many people see it anyway.
We get literally hundreds of spam comments on this blog a day and the software doesn’t quite screen them all out and it takes a little time for us to get to them manually. Sorry. The alternative is to just turn off all the comments.