Market Comment April 2025
This has been a tough few days for the financial markets, a sell-off comparable to the panic of the Pandemic several years ago. The severe reaction of the stock market since the announcement of US reciprocal trade tariffs was precipitated by fears of inflation and recession in our country, and these have spread throughout the world economy.
As the weekend starts, I've seen several articles and podcasts with varying explanations of what's happening, the cause, and the eventual result. Some descriptions of the situation and its resolution are positive, some are quite gloomy, but each one that I've read agrees on how we got here. For over 50 years, and some would argue going back to the end of WWII, the United States has shouldered responsibility for the world's financial system. Starting with the rebuilding of Europe following the war and continuing through the Cold War and the resurgence of Asia, the US has used its economic might to create and maintain world order, building infrastructure and systems to integrate the world's economy, with America and the dollar at the center. We did this because we can, and because we believed it was the right thing to do. We have also seen our material needs as a nation and culture grow exponentially and found willing partners around the world to provide for those needs.
This has come at a cost. While encouraging economic development around the world with dollardenominated aid, loans, and favorable trade terms, we have agreed to buy goods and services from our trading partners in a deal that for many years appeared to work for both us and the rest of the world. Generations of Americans during this time, the Baby Boomers, the Millennials, and Gen X,Y, and Zer's have all embraced an ethos of consumption, where we expect more and more goods and services faster and cheaper, all the while believing, somehow, someone else would pay the bill. Our global partners have happily fed our needs, borrowing from us to create a global network of manufacturing and supply to feed our consumer economy with cheaper goods than we could produce for ourselves. We shifted our capacity to create product overseas because we found partners willing to work more cheaply than we were willing to pay ourselves. For too long, we have believed that the export of jobs and industry that decimated America's Rust Belt, closing plants and mills would self-correct through increased education and technology. We encouraged our young people to go to college, convinced that we were all entitled to better standard of living than our parents. The burden of debt we have created to finance education, housing, and entitlements during these years has ballooned to the point where no one is sure how we will ever pay the bill. We remembered that hard work was always part of the equation, we were just unwilling to recognize that the rest of the world was working harder that we were, while we financed them with our credit cards and national debt.
The answer to all this is not to continue. The answer is not to print more money and expect the problem to fix itself. The answer needs to come from a clear recognition that we have a longstanding problem that needs to be rectified. The sight of manufacturing plants along our highways, standing empty, is a stark reminder that the things that used to be produced in those plants, and the jobs that paid the workers in those plants, are now somewhere else. China, Southeast Asia, and India produce the clothing and manufactured goods we buy on the internet and in our warehouse stores. Call centers in far-away places provide services we depend on. Even our closest neighbors, Canada and Mexico, have managed to do jobs for us that we used to do for ourselves at a lower cost. The paychecks from all the jobs we have seen leave America are now being cashed elsewhere. This is the explanation for trade deficits, tariffs, inflation, and the resulting fear in the stock markets. The problem we face as a nation and an economy is clear. We need to rebuild our own economy, we need to bring jobs back home, and we need to wean ourselves from the belief that someone else will pay the bill, while ignoring the real cost.
The solution that the administration has announced in the last few days will begin the process of changing decades of policy and practices that have seen plants close and jobs leave the US. Tariffs put a penalty on goods and services imported into a country to level the playing field. Over many decades, our trading partners have cemented in place a global system where American money flows out of our economy and cheap goods and services have flowed in. They have quietly, over many years, insured these flows continue by erecting barriers to their own markets making American exports more expensive, everything from cars and steel to wheat and soybeans. American consumers demand quality and low cost, and the global markets, facilitated by the internet, find it for us, usually somewhere faraway.
The reciprocal tariffs that were announced this past week have been painted by some as inflationary, that the cost of living will increase as the cheap imported goods we depend on will now bear a tax or a tariff. Some believe this will mean that our economy will suffer. But the tariffs that have been announced have at their core, the purpose of changing decades of policy and behavior. In my opinion, the tariffs will most probably be very short term as our trading partners quickly dismantle the protective barriers they have erected to their own markets. Many of the tariffs will be absorbed by other countries as a cost of doing business with us, willing to pay to protect their market share.
Here in the US, the tariff program will encourage businesses to bring capacity and jobs back home, bringing with them paychecks back to our middle class. Already we have seen headlines of shifting strategy and capacity by several global firms. Our partners will renegotiate, realizing that the US economy has financed the rest of world for too long and balanced trade with the US is in everyone's best interest.
Over the next few days, the tariff announcement of the past week, and the realization of a drastic shift in the global economy, will play out. There will be renegotiations, shifts in global investment, and announcements of initiatives by both companies and governments. Change is hard and often uncertain, and financial markets don't like either. That's why we've seen a sell-off this past week. But it is instructive to look back to the last time we experienced this kind of change and uncertainty, during the early days of the Pandemic. Then, the world was confronted with a global crisis and no clear understanding of the cause or the solution. Markets tanked on the news.
The current market situation is different. We understand the nature and the cause of the problem. A problem that has been lurking for some time, but no one was brave enough to acknowledge. The uncertainty in the market right now is whether tariffs are the correct path towards a solution. I believe they are. For investors, it is important to always maintain perspective and objectivity. Emotional responses like fear and greed lead to bad decisions and encourage us to follow the herd, even when it is in a crazy stampede. One of the lessons I've learned over the years is the hazard of following the stampede, because it is usually wrong.
In today's global electronic markets, instantaneous information and response mean investment decisions are often made in the moment by computer algorithms that are programed to react to news and price action. During these past few days, we have seen the stock market overreact and panic, accelerated by the algorithms.
The facts are these; employment is strong, inflation is under control, corporate earnings are strong and profitable. I anticipate most of the reciprocal tariffs will be renegotiated with America's trading partners while the base 10% tariffs will remain as a continuing encouragement to build in America and buy in America, something we as an economy have not consistently done for generations. Uncertainty leads to questions, which then lead to solutions and confidence. The herd has lost confidence in the last few days, confidence that has dominated the financial markets since we realized there was hope for a solution to the Pandemic. In those days, those who panicked lost considerably while those who held firm profited greatly.
Have a great weekend, Ed and Claudia
