News & Media
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.
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:
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.
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.
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:
These core beliefs lead us to where we end most of our thought pieces:
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
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