News & Media

From Andy's Office - How Tariffs Could Impact You: Q & A.

Tuesday, May 14, 2019

Twenty years ago, no one "Googled" to search for information. Ten years ago, you didn't "Uber" to the ballgame. Even five years ago, I didn't know anyone "Snapchatting" anything! But to tariff something? In the U.S. alone, tariffs are a 230 year old concept starting with the Tariff Act of 1789 (though the news of the Tariff likely wasn't Tweeted out). So while our transportation, communication, goods, and services look quite a bit different today than 1789, the debate around free trade vs. protecting the interests of domestic producers continues. Rather than attempt to predict what will happen next (the media outlets cover that more than enough), we want to address three key questions we are hearing from our clients and are asking ourselves throughout these trade discussions.

  1. How could tariffs impact us?
  2. In 2018 alone, the U.S. imported $539 billion in goods from China while exporting $120 billion. This wide trade deficit means American consumers and Chinese producers have the most at stake with rising tariffs. Simply put – prices for the things we buy could go up. Here are a few examples around the recently announced 25% tariff hike:

    • CNBC reports that Morgan Stanley analyst Katy Huberty estimates that a 25% tariff on the iPhone could lead to a price increase of $160 for the iPhone XS.
    • Footwear News reports that according to the Footwear Distributors and Retailers of America, the average price for a pair of sneakers could increase from $48.18 to $60.93.
    • CNN Newsource reports about three-quarters of the toys sold in the United States are made in China, according to Toy Association President Stephen Pasierb.

    This certainly does not mean you'll walk into an Apple Store and pay $160 more for your phone today than yesterday. All companies like Apple would have to choose how much of the added cost to absorb vs. pass on to consumers. Plus, large corporations will likely adapt and actively look for ways to reduce manufacturing costs – that's why they had turned to manufacturing in China in the first place!

    Bottom line: While we don't expect American business ingenuity to sit idle should large tariff hikes go into effect indefinitely, make no mistake – the cost of several goods we commonly buy could increase.

  3. What keeps me up at night?
  4. Beyond my 3 year old miniature Schnauzer howling to go the bathroom at 2AM, the current tariff environment certainly presents some potential risks that can leave any good portfolio manager tossing and turning a little at night. My "nightmare – worst case scenario" goes something like this: If a permanent trade war with substantial and broad sweeping tariff hikes causes the COGS (cost of goods sold) to rise, then…
    Companies would need to (1) pass along the cost to consumers and/or (2) absorb the cost themselves, which could…
    Lead to higher prices (inflation) and consumers cutting back, which then…
    Forces the Fed to raise interest rates to fight inflation at a time when…
    The economy is not as strong since consumers are spending less, causing…
    The potential for an economic recession to occur and companies to generate less cash flow, thus creating…
    Possible lower stock prices and market values.

    Bottom line: There are an infinite number of solutions that governments, businesses, and consumers could enact to prevent this exact scenario from occurring, but we still want to acknowledge the fact that the risk itself exists.

  5. What should we do in our portfolios about tariffs?

    So far, I haven't exactly painted a rosy picture. You might read this and think your next iPhone will be more expensive while we're in the middle of a recession! Should we retreat to the hills for cover or get our mattress ready to stuff our nest eggs? Should we jump out of one industry or country and jump into another?

    Not so fast! If there's one thing “thinking in decades” has taught us it's this: geopolitics, policies, elected government officials, and the current news of the day may impact today and tomorrow's market prices, but has little say in determining the real return of investing over the long term. While we don't know what Tweet may hit the wires tomorrow and how the market will react to it, we do believe:

    • Companies will continue to innovate and focus on delivering maximum value to their shareholders.
    • Elections and policy winds will constantly blow and change directions again and again both in the US and abroad.
    • Globalization of the world will continue to progress, helping to bring billions of people in developing nations to the middle class.
    • The technological breakthrough curve will continue to rise exponentially, leading to increased productivity, lower costs, and expanded opportunities throughout the world.

    These core beliefs lead us to where we end most of our thought pieces:

    • Keep your emergency funds, reserves funds, and near term cash needs set aside out of the market.
    • Diversify your investments and target your portfolio risk to be at the intersection of your goals and risk tolerance.
    • Stay on the investment rollercoaster through any tariff hills or twisting turns we may see.

    Bottom line: Tariff policy is one of a multitude of factors impacting markets that we consider in constructing diversified portfolios and should not be used as a standalone factor for making large portfolio decisions.

    Please contact us if you or someone you know would like to continue the conversation around tariffs or what they could mean to you.

    Andy Michael, CFA
    Portfolio Manager

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