2nd Quarter 2025
In “Star Wars: The Empire Strikes Back,” Darth Sidious, speaking via hologram to Darth Vader says, “There is a great disturbance in the Force, I have felt it.” Last Wednesday, on “Liberation Day,” I also felt a great disturbance in the economy, and it’s called Tariffs.
So, what are tariffs. Tariffs are taxes paid by firms importing goods internationally. They are used as a tool to control global trade. After I listened to the President’s comments in the Rose Garden and reviewed his Executive Order, I may be wrong, but I believe this tariff policy is a bad idea for our country for a variety of reasons. I think prices will rise for consumers, I think other countries will retaliate and impose more tariffs. I think tariffs will produce a ton of layoffs. I think tariffs will have a negative psychological impact on businesses and consumers, ultimately leading to a domestic recession and potential global recession.
When tariffs are implemented, they tend to raise prices on both domestically and internationally produced goods. Why? Because the government is putting a tax on the value of the product being brought into the country. The company that produced that product either has to eat the added cost or pass it along to the customer. Most of the time they pass it along to the customer so they can keep their margins profitable. Many things manufactured in the United States source materials from outside the country. If these input costs go up, the domestically produced product costs go up as well. Let’s take the best-selling pickup truck for the past 48 years, the Ford F-Series as an example. 50% of the parts that make up that vehicle are sourced internationally*. If these outsourced parts are slapped with a 25% tariff, as proposed, what do you think Ford is going to do to the price of their trucks? Increase them! Higher prices for consumers, especially on items that are not easily sourced domestically, means consumers have less discretionary income to spend on other goods and services which can lead to a slowdown in overall economic activity. This can lead us into a recession.
Retaliatory tariffs are not good. This happens when other countries try to match or exceed the tariffs we put in place. When this happens, the cost of goods the US sells to other countries gets more expensive and their consumers pay more. When consumers pay more, they tend to buy less. So, the idea that bringing manufacturing back to the US so that we can sell more products internationally is flawed. We already heard rumblings that people around the world are starting to protest purchasing US manufactured products. This is not good either. Retaliatory tariffs can also create trade wars. When other countries decide not to allow our products to be sold in their country, this can become a major problem and could even escalate into a physical confrontation.
Tariffs can start global economic slowdowns. Tariffs reduce the flow of trade between nations leading to potential slowdowns of economic activity. As trade drops, countries can see reduced growth which can ripple throughout the world. When countries impose tariffs, it interferes with the natural flow of trade, making it harder for countries to specialize in what they do best. Not all countries have access to all materials needed for manufacturing, and they rely on each other for those resources. Tariffs can disrupt this global supply chain similar to what happened during Covid and this can lead us into recession.
Right now, 40% of S&P 500 revenues come from abroad**. If people from outside the United States decide to stop buying US products, demand drops and company revenues drop. US companies will begin laying off people because if demand for US products drops, there is no need to make as much product. If people start losing their jobs the US GDP (gross domestic product) drops as well, and this can lead us into a recession.
In short, while tariffs are sometimes seen as a way to protect domestic industry, they often have a cascading set of negative consequences that can lead to higher prices, trade wars, reduced economic growth, and even a recession. By discouraging trade, raising costs, and reducing consumer and business confidence, tariffs can slow down the overall economy, harming both domestic and global prosperity.
When it comes to your finances, we must keep this all in perspective. Remember, when we invest your hard-earned money, we are investing based on your specific needs and goals for the money and not based on what the markets are doing at any given time. We create diversified portfolios that should perform well in all types of market environments. If you feel like your risk tolerance is not properly lined with your current portfolio, please give the office a call so we can make adjustments.
Strap in and hold on tight, it’s going to be a bumpy ride!
* https://www.thedrive.com/news/heres-why-all-american-full-size-trucks-arent-entirely-made-in-the-us
**https://www.reuters.com/markets/us/wall-street-futures-tailspin-tariffs-fuel-recession-fears-2025-04-03/#:~:text=Bar%20chart%20showing%20that%20the,have%20the%20lowest%20at%202%25.
All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful. A diversified portfolio does not assure a profit or protect against loss in a declining market. This material is for informational purposes only and is not to be construed as a recommendation of any kind.