Wednesday, April 9, 2025
“We call a tariff a protective measure. It does protect…it protects the consumer against lower prices.” – Milton Friedman, Nobel Prize winner in Economics in a speech given on April 27, 1978 at Kansas State University.
With President Trump’s introduction of the across-the-board tariffs last week, we could easily see higher prices for essentials like groceries as well as bigger ticket items like iPhones. Higher prices will mean inflation, but it could also mean consumers and corporations will put a halt on spending, which would mean an economic slowdown. If spending continues, the Federal Reserve may have to step in and increase their Federal Funds rate to dampen inflation. As of right now, the Fed is sitting on the sideline and most likely will stay there for several weeks. My hope is that the targeted countries will negotiate with Trump and come back to free and fair trade. Everyone wants a level playing field, right?
Our investments all rely on corporate earnings – they are the chief concern. The tariffs bring a tremendous amount of uncertainty to the CEOs running the corporations we invest in. As I write this, corporations are trying to figure out how these tariffs will play out between them and their domestic and – especially – their foreign trading partners. Because of the uncertainty, many corporations are pulling their forecasts and, thus, investors are responding by selling stocks. Everyone hates uncertainty – especially investors. Some analysts are comparing this time period to when Covid first struck. Instead of reducing earnings estimates, corporations just pulled their forecasts all together.
It is no wonder that Trump’s tariffs are bringing comparisons to the Smoot-Hawley tariffs that were passed in 1930 on 20,000 imported goods. The government at that time wanted to protect farmers and industry, but they ended up extending the Great Depression. I am not predicting another Great Depression, but several firms – including Vanguard – have just increased the likelihood of the US entering into a recession this year. In fact, some think we might be in a recession right now.
I had a Money and Banking professor back in my college days ask “How do you know if you are in a recession or a depression? You are in a recession if you know of someone out of work. You are in a depression when you are out of work.” Due to the tariffs and increased odds of a recession, consumer sentiment most likely will continue to decline. That means consumers will be reluctant to spend their hard-earned dollars if they are uncertain about their job. Remember, the Fed has a dual mandate of keeping inflation down as well as keeping unemployment low. So, you can see the conundrum the Fed is in: If they decrease rates to hold a recession at bay (as President Trump has asked) they risk higher inflation. However, they risk going into a recession and higher unemployment if they keep rates high or increase rates to combat inflation.
How does all of this impact our portfolios? The tariffs were not put in place until after the first quarter. Thus, your enclosed reports are going to look okay. The sell-off began the day after President Trump announced the tariffs: Thursday, April 3rd. As I write this, the S&P 500 is in a correction (greater than 10% decline) and it is flirting with a 20% decline or what we like to call a bear market. If you have ever wondered why we don’t have all of your assets in index funds, this is the reason. Index funds are difficult for money managers to beat in bull markets, but these same fund managers have an easier time beating them in bear markets. Diversification seems to be paying off right now. Bonds have positive returns and Berkshire Hathaway continues to buck the equity market with their solid return. Our domestic dividend paying funds (Vanguard Dividend Growth and T. Rowe Price Dividend Growth) are down about half of the S&P 500 return and our foreign stocks continue to show positive gains. Analysts believe the large-cap stocks like the Magnificent 7 are still priced too high while mid and small-company have P/E ratios of around 14-16, which is starting to look cheap. International stocks like Dodge & Cox International and First Eagle Overseas have 11 and 13 P/E ratios respectively. Thus, mid, small-company and foreign stocks seem inexpensive right now.
“Don’t just do something, stand there!” – John Bogle, founder of Vanguard.
That kind of sums up our stance regarding managing portfolios in volatile times. This is where your asset allocation comes into play. During stretches like this, I have always recommended if you are not sleeping at night, please let me know. I might recommend taking 5% off of the equity side and moving it over to the fixed income side. It is amazing how a little move like this can settle an investor down. That said, we would prefer you to stick to our original asset allocation plan and let the portfolio do its job.
Speaking of possibly making changes to your portfolio, many of you have probably seen some changes made in the past few weeks. CJ and I decided to add a Vanguard Short-term TIPS (Treasury Inflation Protected Securities) fund to the portfolios that hold fixed income. Vanguard has recently convinced us that holding an intermediate (4- 7 years in average maturity) TIPS fund did not protect against inflation surprises like a short-term (1-3 years in average maturity) TIPS would. The Fed has become pretty good about combatting inflation, lasting more than a couple of years by increasing the Federal funds rate, but it cannot control the unexpected inflation that can pop up within the year. The VTIP fund seems to be doing well. As of the close on April 8th it is up 3.13%, which is almost 12% on an annual basis.
The other changes we made essentially lowered expense ratios and – hopefully – created a more tax efficient portfolio in the years ahead. We sold Primecap Odyssey Growth fund (POGRX) and purchased the sister fund, Vanguard Primecap Fund (VPMAX). VPMAX has a better track record and a lower expense ratio. It just opened to new investors, so we jumped at the chance to add this wonderful fund to our model. POGRX and VPMAX are managed by the same management team, but they have slightly different objectives.
We also added a new security that was just introduced by First Eagle funds. First Eagle came out with a more tax efficient and less costly exchange traded fund (ETF) version of their popular First Eagle Overseas fund. ETFs are inherently more tax-efficient due to a firm that acts as the market maker for that ETF. Thus, instead of selling the underlying holdings, these holdings can be swapped out, which prevents capital gains from occurring. The other reason we liked the ETF is that they stripped out the gold bullion from the ETF version, which in my mind made sense. I am not a huge gold fan. The ETF version still has gold mining stocks, however. To summarize, going through an occasional bear market is normal for any equity investor. In fact, we have been through 20% equity declines in 2020 and 2022 and now in 2025. That said, using a blanket across-the-board tariff is not normal. We hope cooler heads prevail and, eventually, the tariffs become more surgical in nature. In the meantime, it is what it is and we will need to deal with it. For anyone contributing to your retirement accounts, keep contributing! You want to buy low – not at all time highs! For those in retirement, we feel we have well managed funds where each security has a role to play. The managed securities should hold up better than their underlying indexes during these difficult times. We will be reviewing your portfolios and may rebalance where we think it makes sense. Please do not hesitate to contact us with any questions!
– Best regards, Bill and CJ