The new Trump administration introduced several market-changing policy shifts in the first quarter with the net investment impact being a modest decline of 4% in the S&P 500 for the quarter. This pullback was not surprising and followed two very strong years for equities. However, the launch of President Trump’s much higher than expected tariff strategy on April 2nd was met by an immediate and fierce decline bringing YTD returns down to -14% by the end of the first week of April. Generally, it felt even worse with investor and consumer confidence falling precipitously and with many investors concerned the US economy was headed into recession. We are disappointed the tariffs were established at levels much higher than expected. We don’t expect these rates to hold long-term but recognize that the markets will remain volatile in the meantime.
Our experience suggests that the stock market may have already fully discounted the eventual impact of the tariffs. The historical track record after strong 2-day selloffs is for markets to bounce back almost entirely over the next month to six months. This is why it is particularly important not to make hasty investment decisions when markets appear in the throes of panic selling (with the VIX above 40).
Unfortunately, the tariff strategy has little support outside of the President’s cabinet because it is not considered economically sound. Tariffs generally act as an anti-growth tax on consumers that will increase inflation. Regardless of the President’s motives, this leaves investors guessing how damaging the outcome may eventually be to businesses. Over the next few weeks, we expect President Trump to counter investor concerns in a number of ways. The tariffs will likely be subject to renegotiation with many countries already signaling their willingness for further discussion. Regulatory restrictions may be loosened. Tariff revenue may be redeployed for pro-growth initiatives including tax reduction and industry support. The Fed may also get involved by accelerating expected interest rate cuts. If President Trump loses Republican support for his tariff strategy, he may be forced to consider other “market friendly” alternatives like equal but low tariffs.
What ultimately matters for our clients is how do these changes and uncertainties impact the businesses in their portfolios. When we review current balance sheets and cash flow models, we see strong businesses. Although a slowing economy would moderately reduce free cash flow generation, it would not put any of our holdings at actual operational or financial risk. The financial strength of the underlying businesses allows time to adjust; and we have confidence in the management teams to make appropriate strategic and operational changes as needed.
At this time, it is important for investors to have sufficient liquidity to meet their needs and to understand their time horizon is long-term. We look forward to hearing our companies’ first quarter updates on current business trends, and how they foresee the new tariff policies affecting their businesses over the next year.
We realize these are difficult and uncertain times for everyone, and we thank you for your trust and faith in our ability to manage your investments through this tumultuous period.
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