1st QUARTER 2025 NEWSLETTER
Contributors
Dear Clients, Friends & Family:
I kick off this quarterly commentary with a little twist… Just recently my daughter turned five. She has always been incredibly precocious and curious but as of late, she has leveled up. Multiple times throughout the day I am peppered with questions and exasperated remarks such as “Why Mom?” and “That doesn’t make any sense!” Or my favorite, “This is the worst day ever!” quickly followed by “Mommy, why is Earth called Earth?” I share this anecdote with you for a few reasons.
I hope it brings a smile to your face! Many of you can hear those same questions in your head. But truthfully, as financial advisors and confidants in your life journey, we are constantly asking ourselves the very questions that bring us back to basics… “Why?” and “This simply does not make sense… so what is really going on?” In chapters of significant volatility and uncertainty, we are reminded of the importance of slowing down and asking the right questions which are often the fundamental building blocks of problem solving.
And just last week, my daughter yelled through her tears that “This is the worst day ever!” after I refused her another scoop of ice cream. She screamed and cried as I explained it is not my job to simply say yes to everything she wants. It is my job to teach and reassure her that it is OK to show disappointment and frustration. She cried for another 15 minutes and then asked me: “Mommy, why is Earth called Earth?” to which I said, “That is a great question. And I have no idea!”
Recently, markets have felt like a volatile five-year-old kid – a living, breathing emotional pendulum – that is uncertain of the rules to play by and answers to questions that seem so simple. Recent market volatility is nothing new but it still feels awful, unsettling and generates new questions every day – launching our own emotional ride on a playground seesaw.
So, let’s address the pendulum – Tariffs, Trade & Global Tensions
Our country has been utilizing some version of a tariff for hundreds of years. This is not innovative policy; however, the game has changed. In many ways such drastic tariff measures represent decades old policy in a world moving at the speed of light. And we are reminded yet again to slow down and ask why.
Most recently, we have experienced some of the most volatile trading days since Covid. The uncertainty around fair trade policy, tariff calculations and emotionally riddled headlines has created a sense of confusion amongst investors and citizens of the world. In other chapters of volatility, there was typically some unpredictable event that has thrown markets into chaos. In this case, market volatility has primarily been a byproduct of corporations lowering their forward guidance as a result of specific tariffs. As well, the current administration has made it clear they want serious change and they want it now. This extremely aggressive stance has rattled global trading partners and world markets. And so, uncertainty abounds. However, overreactions can still occur – to the upside and downside. As quickly as the market sold off, we made a rebound of equal measure.
Regardless of political affiliation, tariffs are relatively bipartisan. They are an international trading tool aimed at leveling the playing field. But in many ways, our country’s trading deficit with other countries is the price of our own success as a global economic leader. Our country shifted from a manufacturing economy to a service economy, which dominates employment and economic activity. Industries such as banking, healthcare, restaurants, education, and even movies are examples of intangible services that can be customized to meet a specific need. This economic shift over many decades allowed our country to benefit from technological advancements, corporate profitability through outsourcing and globalization, and has catapulted some of the most incredible innovations our generation will ever see. The U.S. now produces fewer goods which means we need to import more of them. Basically, we no longer make potato chips. We design computer chips. And a service economy often does not translate into perfectly balanced trade.
There is another piece of the puzzle – and that is the difference between balanced trade and fair trade. Up until this point we have been discussing why our country has unbalanced trade and a trade deficit. There is a logical path to answering the why. But trade is not always fair. There are studies that illustrate how China, in particular, has not always played by the rules. Whether this has been via currency manipulation, IP theft or tighter restrictions accessing certain Chinese markets, many economists believe the only way to enforce a level playing field of fair and balance trade is to maximize tariffs on exports from these countries.
However, the country being tariffed is ultimately not being punished. The tariff is passed onto a corporation importing from the very country we have just tariffed. Apple imports many iPhone components from China – glass, camera lenses, batteries, chips, etc. Apple then pays a tariff for importing those products to build their iPhones. Ultimately, Apple then has a few choices… to decrease their profit margins because their cost of doing business has gone up or increase the stated price of their consumer products in an effort to maintain their growing revenue. Historically, the market does not like either of these choices and a consumer certainly does not like higher prices.
The challenge for policymakers is to balance open trade with fair competition. Our country has used different tools over the years, like tariffs, diplomacy, and renewed or revised trade agreements – all of which have worked and not worked in different chapters. Most recently with the administration’s postponement of many tariffs, markets have recovered in a similarly sharp ascent. It is now more than ever where we need to remind ourselves that as quickly markets can dip, there is potential for a mirrored recovery. While no historical pattern can predict what comes next, we believe it is important to slow down and remember to ask ourselves the questions that are ultimately driving long-term investment decisions – your own time horizon, risk tolerance, unique set of values, legacy goals, and many more. In some cases, we have increased international exposure, added gold and/or commodities, and late last year started a slight rotation from technology to consumer staples. These are minor adjustments that we believe are prudent and reflect opportunities and challenges we may face in the coming months. We remain confident in the health of our economy and even with a slow down in growth, we believe there is still room for such growth – albeit with some bumps along the way.
If you have any questions related to your unique situation, we encourage you to reach out to us so we can continue supporting you through peaks and valleys of life, investing and planning for what’s next.
P.S. Does anyone know why the Earth is called the Earth? Without Googling it…
