Q1 Commentary – Tariff Whiplash
Turbulence is an apt term to describe this year’s political and economic climate thus far. With mounting pressure in the Russia-Ukraine war, the ‘Liberation Day’ trade war, and overall inflation issues, Americans have a lot (and a little) on their plates. The rampant political discussion should not hamper views of long-term holdings’ performance, given consistent historical returns from our market, and our strong democratic political system, insinuating that America always eventually climbs its way out of economic turmoil. As a nation, we have endured numerous stock market crashes, namely: WWI and the influenza epidemic in the 1910s, the 1929 crash and the Great Depression, Vietnam and Watergate, and the Covid-19 pandemic. Each and every time the market has rebounded and reached all-time highs.
Q1 had its bright spots and its dark spots, but those who over-panic at the market during these times will likely not get rewarded as much in the long haul.
Distress Amongst Wage Growth
Wage growth continues to exceed the inflation rate in the first quarter; however, we see lower-income households citing financial distress from higher prices on basic goods, like the record-high egg prices. The Avian Flu epidemic, impacting nearly 110 million birds, is the primary cause of the skyrocketing egg prices. The USDA has adjusted its egg production forecasts downward for 2025, so the egg supply recovery will take longer than expected.
In Q1, job openings cooled, particularly at the end of February, likely due to federal government layoffs and policy-driven uncertainty. Though job openings have slowed, we see a steady and normal unemployment rate of 4.1%. The FED is expected to cut the funds rate to 3, instead of 2, in fear that the tariff implementation will slow growth. Due to the tariffs, we are in a state of stagflation: slowed economic activity, while simultaneously experiencing inflation. Stagflation puts monetary policymakers in a strange position, deciding between cooling inflation and stimulating economic growth. Though the FED is timidly cutting rates, lower interest rates are intended to help our economy stay afloat; the FED is prioritizing stimulus over quantitative tightening policy.
Surging Expectations
With more economic activity and supply issues, we can likely anticipate higher inflation rates. With higher consumer spending and demand for goods, producers charge a higher price. Although we expect higher inflation, inflation rates have dropped to 2.4% this quarter, particularly by 110 bps year-over-year (YoY).
Year-to-date, the S&P 500 is down 1023 bps, but up 208 bps YoY, which greatly deviates from the average 1013 bp annual return. The market has tumbled in large part in response to President Trump’s tariff plan; investors realize that tariffs raise prices and crimp growth, which heightens chances of a recession. Stock futures are generally down and only time will tell how this economic experiment will play out.
The Consumer Carries the Burden
President Trump has imposed a ten percent baseline tariff on all American imports. He also has instituted something called “discounted reciprocal tariffs” on dozens of countries that have the highest trade deficits with the U.S. Moreover, imported cars will face a 25% tax effective April 2. In the short run, these tariffs cause a shock to businesses who have to maintain production for their buyers. If they now are experiencing higher taxes to collect their supply, they now have to rework their operational expenses. Most businesses cannot build the factories here in America for production – or if they can, that likely means higher labor expenses and property costs. Who does this high expense burden fall on? The consumer. Price increases coming from exogenous factors like government policy instead of from natural free market behavior will only hurt the overall economy, which does not bode well for the stock market.
Stay Calm and Carry On
However, we should not panic! Blue chip stocks are going to return to normalcy. In fact, many years with large intra-year declines ended with positive annual returns. Notably, in 2020, the market dropped 35% during the COVID lockdown, and the Russell 3000 still ended up 21% on the year. In 2009, the market dropped 27% and still ended up 28% at the end of the year. The only years, in the last 20 years, when the market declined and stayed down, were 2008 (subprime loan crash), 2022, and 2018. Every other year since 2005 has had dips within the year but finished positively.
The forecast for the outset of the second quarter is turbulent, but it is encouraged to stay put and weather the storm. The impact of getting out of the market for a short period can make a huge difference on a portfolio. As seen in the figure, a $1,000 investment made at the beginning of the year 2000 turns into $6,604 after 25 years. If you were to miss the Russell 3000’s best week during that period, the value shrinks to $5,511. Missing the best month, which was during the height of the COVID lockdowns, your investment value diminishes to $5,274, and so on. As we head into this next quarter after a rocky end to Q1, let’s try to keep calm and carry on.
Stuart B. Allen guides the overall direction of the firm, is active in trust administration, and helps shape the investment policy for the company. Stuart holds a finance degree from the University of Oregon, a law degree from Texas Wesleyan University, and a Series 7 and 63 license and has been in the investment committee from the founding of Allen Trust Company and Allen Capital Management.
Disclosure: The information provided in this writing is for general informational purposes only and does not constitute financial advice from Allen Trust Company and Allen Capital Management. Readers are encouraged to consult with a qualified financial advisor to assess their individual circumstances and make informed decisions based on their specific situation.