Over the past several weeks, tariff discussions have dominated financial news, creating a climate of uncertainty that has rippled through markets. The Trump administration’s recent move to propose a 25% tariff on Canadian aluminum and steel -only to retract the decision later that same day- illustrates just how unpredictable trade policy can be.
The dynamic environment has left market participants trying to guess where these tariff talks will settle. Concerns over the potential inflationary impact of tariffs and rising recession probabilities have led to heightened volatility over the last several weeks.
Couple this rising uncertainty with historically elevated US equity valuations and you create a backdrop for a market pullback like we have seen. We have even seen some asset classes enter into correction territory (10% drawdown) with others holding up relatively well (international markets and value stocks).
At the core of this volatility is the fundamental reality that tariffs alter competitive dynamics across industries, creating both winners and losers.
Key Impacts of Tariffs on Investments
- Beneficiaries: Domestic industries shielded from foreign competition (e.g., U.S. steel producers during tariffs on foreign steel).
- Losers: Companies dependent on global supply chains (e.g., auto manufacturers using imported parts).
- Corporate Profits & Costs: Higher tariffs increase costs for companies that rely on imported materials, potentially lowering profit margins (e.g., Apple’s costs rise if tariffs on Chinese components increase).
- Consumer Spending: Higher import costs can lead to inflation, reducing consumer purchasing power, which affects retail and consumer goods stocks.
- Stock Market Volatility: Tariff announcements often lead to market swings as investors adjust expectations based on trade policies.
- Currency Movements: Tariffs can impact exchange rates, affecting multinational companies and emerging markets.
Investment Strategies Around Tariffs
While uncertainty is never comfortable, investors can take a disciplined approach to navigating tariff-driven volatility.
- Macroeconomics: For better or worse we believe tariffs are inflationary. There will be upward pressure on prices of goods related to tariffs as historically this has been the case, and we have no reason to think this time is different. Additionally, the US economy has potential to experience some bumps and bruises as a result of this transitory time period.
- Commodities & Alternatives: Some investors hedge against trade tensions with commodities, domestic-focused real estate and hedge fund exposures.
- Company Specifics: Companies with strong domestic supply chains may be less affected and more resilient. International supply chains became strained ahead of covid as a trade war had already begun and may become more strained as tariffs persist.
- International Markets: Countries facing tariffs may see slower growth, impacting investments in their markets. Furthermore, countries that are on less stable economic footing are most at risk.
- Asset Allocation: Procyon believes strongly in diversification as it remains essential as the various tariffs are renegotiated on an ongoing basis. We have already seen the benefits of diversification as asset classes have reacted vastly different in the market drawback. Growth stocks and Small Caps are down over 10% since February 18th. Value stocks are down -5.6% and international stocks are down just -1.35%. Fixed Income markets are up over that same time period.*
Tariffs in Historical Context
While today’s trade tensions may feel unprecedented, tariffs have been a fixture of global commerce for centuries In Ancient times, tariffs existed as a way to regulate trade and raise revenue. In the 16th-18th century, Europe used high tariffs to protect industries and control trade with a focus on wealth accumulation. In the 19th century, the industrial revolution sparked debate between free trade and protectionism. In more recent history, the WTO reduced tariffs globally in 1995, but trade tensions in 2018 reintroduced protectionist measures. In the U.S., tariffs are currently being deployed with two primary objectives:
- Protectionism: The US is using tariffs to communicate to neighbor nations that they need to secure their borders to the United States (International Emergency Economic Powers Act or IEEPA) due to flows of illegal drugs, undocumented immigrants and contraband.
- Trade Deficit: The US is using tariffs globally (Fair and Reciprocal Plan) to help offset trade imbalances with other nations. In January the US trade deficit was $131.4b.
President Trump’s 2025 tactics rhyme with his actions throughout 2018. We saw a similar drawdown in early 2018 as concerns over a trade war spooked markets. Over the next several months, markets remained choppy as the tug of war between US and China continued. Finally, as the threats subsided and the tariffs settled, markets rallied nicely before a December sell-off that was not trade-related.
Lessons learned from that time period still ring true today in our portfolios. Namely, the benefits of diversification, ensuring you are properly allocated according to your plan and risk tolerance, and the ability to be patient in the face of volatility.
*Source: Ycharts.com
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