Do you remember the Trump-declared Liberation Day for tariffs, which was April 2, 2025? At that time (I have witnesses at the office and with clients) I felt that this was a negotiating tactic, and that by mid-Summer the markets would be happy and we would have more predictability. However, this is not about me being right. Instead, I grossly underestimated what was happening. Note that the following is a summary since I don’t have the space to provide all the charts and quotes.
To recap: when Liberation Day was declared, the equity markets had a “tariff tantrum” and dropped precipitously because the popular ‘economists’ on media said that inflation would be super high, we would have massive supply shortages, the stock markets would be destroyed, and generally everything that could possibly go wrong would go wrong. If you looked at history, however, you knew a couple of things. In 2018 when the China tariff issue first arose the markets dropped, and then turned positive with a vengeance in 2019. At one time in the U.S., the only source of revenue for the government was tariffs (no income taxes, imagine it). Finally, tariffs could provide much needed revenue for the government. And yes, in 2018 and 2019 inflation was very much kept in check. Therefore, many of us surmised that we could have a similar positive result, or at least not as dire a consequence from tariffs as the so-called experts predicted.
Then we had the tax bill (Alloy recently did a great webinar regarding this, and you should watch it), which passed, although not with everything that everybody wanted; but with a lot of worker, family, and retiree-friendly pieces. That creates more predictability.
But as I indicated, I was wrong about a couple of things. First, we knew that the President touted tariff changes so that the trading and supply chain existing paradigm would be restructured to be fairer to the U.S. The current tariff situation had to be reworked to reflect the current reality, not the post-WWII and third-world China history. But there are other things that are important, and which seem to be moving in a positive direction:
- As of this writing, the S&P 500 is up year-to-date 9.41%. I was (maybe) wrong, as I predicted that the S&P 500 would be up about 6-7% by yearend.
- Billions of dollars have been pledged and provided for factories and other business operations in the U.S as a result of the negotiations. I did not think that this would happen as fast as it has.
- Tariff agreements have been reached with many countries already, with the latest being the EU. To my surprise, economic negotiations have also helped to quell the India/Pakistan recent hostilities and the Thailand/Cambodia border dispute.
We are seeing positive effects from this four-pronged approach: Negotiate with economic pressure, Rebalance trade to reduce the trade deficit and boost domestic production, De-couple supply chains to escape dependence on certain countries, and Generate Funds to reduce the deficit and fund domestic goals (you may have noted that we had a surplus in June!). I am surprised it is working this well already, but also will keep an eye out for bumps in the process.