Last week, the President hit virtually the whole world with reciprocal tariffs that were far more than most expected. This caused some countries like China to immediately retaliate, but probably more worrisome is that it took the world’s equity markets down more in two days than had been seen in only four prior times since 1950.

These drops always cause concern, and generally, it's for good reason. COVID, Financial Crisis, and, in this case, the threat of tariffs. During COVID, we not only had a shutdown of the economy, but an uncertain virus that was more scary at the time than the market reaction. Those months were filled with uncertainty, but we worked through them faster than anyone could have expected. While the Financial Crisis beginning in 2008 took longer to work out, it eventually did, even when many days we were concerned with what banks would fail next. I remember trading bonds on the morning of the 9/11 attacks, and the markets closed for four consecutive days. Had they been open, I can’t imagine what would have happened. Ultimately, we moved forward, the markets recovered, our world changed, and we all adjusted. 

This brings us to the tariff crisis. What have we learned from the past? All of these events eventually will be reconciled with time. If you look at the chart below, you will notice that in the previous large declines, one year later, the S&P 500 was marketably higher. Five-year returns are even more so. While this is by no means guaranteed, things happen, companies innovate, and market cycles move on. 

Source: S&P 500 Index data from Morningstar Direct. Returns are cumulative and do not include dividends.

However, this time, this seems somewhat man-made and can seemingly be undone with the snap of a finger. Many countries such as Israel, Cambodia, India, and Vietnam are already offering to structure a trade deal to avoid further tariffs. These will all take time to negotiate, so we hope for a delay or off-ramp that the President can get behind. While the endgame is not in sight at the moment, it’s hard to believe the President will risk his legacy and mid-term elections by stifling market growth by stoking uncertainty. 

Having a non-emotional reaction to this is probably the best strategy. Planning ahead and making sure we maintain some liquidity allows for the time to let the markets work things out. You own companies that innovate every day and will adjust to the new scenario and may even benefit over time. Some won’t, but that is why diversification is key.

We shouldn’t fall into emotional decisions to panic and do something. Selling is easy, but it’s getting back in that will be the hard part. By the time the coast is clear, the markets typically have already left the station. 

Source: MarketWatch

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