Tariff Tantrum or Trading Triumph
Historical Perspective:
Sometimes Presidents try to maintain the status quo. Which is to say they continue a general policy direction across election cycles and even across party lines. This status quo might include foreign policy as well as economic policy. For example, the concept of communist containment without direct military confrontation emerged in the late 1940s under Truman and continued until Reagan in the 1980s when he committed technical and economic assistance to fight communism. On the economic front, Presidents of the last 20 years have generally embraced deficit spending while embracing global trade and trade alliances with Allies.
In Trump’s 2024 campaign, and even as far back as 2019, he made it clear he viewed tariffs as a tool to win better trade terms from allies to level the playing field, as a way to even the score with enemies (e.g. China), bring manufacturing back to the US and deliver revenue that might offset the need to tax US citizens.
In addition, Trump signaled during the campaign that he wanted to improve government efficiency. That initiative is now widely known as “DOGE,” led by Elon Musk. This policy looks to streamline the US government payroll and modernize many of the IT systems that today are antiquated and don’t “talk to each other,” driving fraud, abuse and inefficiency. In the last 50 years, both President’s Clinton and Reagan embarked on government efficiency efforts to streamline the US government. The most recent “balanced budget” occurred during the Clinton administration.
It’s not an accident that I started this piece by mentioning Reagan. President Trump has often cited Reagan as a president that he admired, in particular his economic policies and stance on American strength. It’s my belief that Trump is channeling his inner-Reagan, if you will. The start of Reagan’s term was marked by high inflation that started in the 1970s. Early in Reagan’s term, he took bold actions aimed at putting the economy on a better long-term trajectory. These actions may have led to, or at least didn’t slow the recession that resulted by the summer of 1981. These policies included:
Support for dramatically higher interest rates to combat inflation.
Tax cuts & deficit spending that initially led to rising budget deficits, increasing uncertainty in financial markets.
Cuts to government spending such as food stamps, welfare, and public employment programs.
Deregulation and business restructuring, impacting banking, energy and manufacturing, especially in the Rust Belt as foreign competition increased.
The first half of Reagan’s first term, then, was punctuated by a long recession that lasted from the summer of 1981 through November, 1982. Unemployment spiked from the 7% range to 10.8% at its peak. Reagan was ultimately vindicated as the economy grew 4.6% in 1983 and 7.2% in 1984 and unemployment settled back down to 7.3% by the end of his first term, and had fallen to 5.3% by the end of his second term).
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Analysis of Trump’s Thought Process & Approach:
I really don’t know the long-term economic impact of the Trump tariffs and DOGE. I’m convinced very few people do. And this uncertainty and anxiety tends to unsettle markets. At the same time, there are several economic developments that Trump is considering as he makes his policy changes:
There are several “good” things potentially giving Trump cover to make bold moves:
Inflation is dramatically lower than it was just 6 months ago.
Unemployment remains low compared to historical standards.
And yet there are “bad” structural issues that have been exacerbated during and after COVID:
Budget deficits are at record highs, leading to record high debt.
Job growth has been led by government employment.
And one issue, a trade imbalance, that Trump believes can be corrected.
What follows is more detail on each of the points:
The “Good,” part 1: Truflation shows a dramatic slowdown in the rate of inflation. The current estimate, as you can see below, is 1.79%, well within the Fed’s target range of 2%. This may embolden the administration to believe interest rates don’t need to go up further and suggest the economy can withstand some turbulence from tariffs.
The “Good”, part 2: The US unemployment rate at 4.1% remains low by historical standards:
The “bad” part 1: The budget deficit as a % of Gross Domestic Product is at record highs:
The “bad” part 2: Recent data indicates that a notable portion of US job growth has been driven by government employment:
In 2023, government jobs accounted for nearly 25% of all newly created jobs.
In 2024, government sector employment grew by 2.7% year over year, the highest rate since 1990.
In June 2024, approximately ⅓ of the 206,000 jobs added were in the government sector.
It’s likely that Trump’s attempt to cut back government jobs is in recognition of runaway government deficits/spending and the growth of government jobs post-COVID.
The “bad” part 3: Trump is adamant that the US is being taken advantage of with respect to trade. Trump believes car and truck tariffs will raise $100 billion annually, and plans to announce another $600 billion a year in tariffs on 4/2/2025. He views these as necessary to correct the trade imbalance and potentially move manufacturing back to the US. When asked by NBC News about his level of concern that foreign car prices might go up, he was quoted as saying “I couldn’t care less, because if the prices on foreign cars go up, they’re going to buy American cars.”^ In our view, tariffs are a tax and both US and foreign manufacturers will raise prices, impacting consumers and potentially adding to an economic slowdown. Which brings me to the third part of the article…..
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State of the Economy and Portfolio Rebalance:
Shifting gears once more, Trump has hinted that he recognizes the potential recession on the horizon amid the trade tensions, market volatility and DOGE impact stating: “I hate to predict things like that. There is a period of transition, because what we’re doing is very big.” (Trump on Fox News “Sunday Morning Futures” on Sunday, March 9, 2025).
As I stated above, I believe he recognizes the risk of recession, much like Reagan accepted early in his term, on the belief that he is making structural changes to the economy for long-term benefit. I also believe Trump reviews much of the same data available in the public domain and sees a recession as increasingly likely as evidenced by the following:
As you can see in the chart below, the cyclical economy is forming a mountain top in 2025, much like tops in 1988, 2000, and 2006, prior to past recessions. When you think of the cyclical economy, think of construction and manufacturing. “Construction and manufacturing are critical because of their sensitivity to changes in monetary policy (e.g. interest rates). Measuring the change in construction and manufacturing directly measures the growth or production of those goods and the employment needed for production of those goods.” (EPP Research). This measure tends to have a big impact on the economic cycles.
In addition, retail sales are slowing, dropping below the trendline that’s been in place since 2010.
Ultimately, the economy leads stocks. As a result, it’s very possible that Trump's pending tariff approach and DOGE are additional uncertainties, but not the primary cause of the recent pull back, since most of them haven’t impacted the economy yet. The economy is slowing, earnings growth is moderating, and stocks have dropped in price. As you can see below, the only index in positive territory for the year to date period is bonds. All the other major indices are negative, albeit fairly benign at this point.
If the economy is rolling over and policies contribute to a slow down in the near future, we think it’s super important to remember what we are taught as financial advisors - diversification is critical. Rather than trying to time the market or economy, it’s important to take the risk that matches your investment timeframe and appetite for that risk.
It’s worth noting that recessions typically last between 6 and 18 months. That’s a long time to be sure. But for more aggressive investors, it’s really a time to buy stocks on sale rather than sit on the sidelines. For these aggressive investors, we are looking at a rebalance away from economically sensitive stocks like small caps and toward more international exposure. And for conservative investors, it’s a time to rebalance toward bonds, taking some risk off the table. If the economy is slowing, rates may drop, making bond prices go up.
During the slow down, we can root for structural changes to the economy to make us better off for the future, cheering a Trading Triumph. If instead we simply get a recession without beneficial structural changes, we might look back in frustration at the Tariff Tantrum.
Jared
What’s Your Financial Story?
** Wharton School of Business article: https://budgetmodel.wharton.upenn.edu/issues/2023/10/6/when-does-federal-debt-reach-unsustainable-levels
All other YCharts graphs are created by me, Jared Kline.
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