Tariffs might not be drag on markets that some fear

My intent with this piece is to give you my perspective on what’s going on. I’m certain it won’t always agree with a lot of the consensus thinking, but as we say, differences are what make markets. 

President Donald Trump has accused Canada and Mexico of facilitating flows of illegal immigrants and fentanyl into the U.S. He declared that he would levy tariffs of 25% on imports of all goods from the two countries. He also promised to levy additional tariffs of 10% on Chinese imports over complaints about fentanyl production. China already has tariffs averaging around 15%.

The Oxford Dictionary defines a tariff as “a tax or duty to be paid on a particular class of imports or exports.” The fact is that tariffs have a long and storied history as both a revenue-raising tool and a way of protecting strategically important industries in the US. Prior to the 16th Amendment, which authorized the individual income tax, tariffs were one of the federal government’s chief sources of funding. Our first Treasury Secretary, Alexander Hamilton, also happened to be America’s original proponent of tariffs. 

Tariffs can be a useful tool for achieving the president’s foreign policy objectives. Whether it’s getting allies to spend more on their own defense, opening foreign markets to our exports, securing cooperation on ending illegal immigration, interdicting fentanyl trafficking, or deterring military aggression, tariffs can play a central role. 

We’ve seen that Mexico and Canada have, at least temporarily, agreed to terms that will allow them to avoid anything on the scale of 25% tariffs. The cost of doing otherwise to their economies would be too high. As a point of fact, 77% of Canada's exports and 83% of those from Mexico go to the United States. And Mexico's exports to the U.S. add up to nearly one-quarter of its gross domestic product.

Our U.S. economy is $29.3 trillion in size. U.S. household net worth is there too, at $155 trillion. Our size gives us market power, and other countries need access to our markets. 

Critics of tariffs argue that they’ll increase the prices Americans pay for imported goods. Facts argue against this. President Trump’s first-term tariffs didn’t raise the prices of the affected goods. Indeed, not only was there no discernible rise in inflation during the last round of tariffs, but the Fed’s preferred measure of inflation actually declined. 

Market participants appear to either not expect the tariffs to actually come entirely to life, or they’ve largely been priced in by traders, according to Jamie Cox, managing partner at Harris Financial. 

It’s unclear at this point what tariff policies would actually look like if and when they are totally implemented. The current uncertainty in the markets demonstrates this.

The main theme seems to be this: Tariffs = Talks = Deal. Not every time, but more often than not, tariff talks can generally lead to outcomes that are milder than feared. Markets don’t need perfect, risk-free conditions. They move on the gap between expectations and reality. A reality that’s simply not as bad as feared could prove to be a big positive surprise.

This time, the threats seem to be following the same blueprint. They look to me like negotiation tactics, loud calls to the table. Will they work? An open question. Maybe they lead to a deal. Maybe other countries band together to increase their clout. 

We’ve also seen that the U.S. and global economies have been pretty good at adapting. We have the recent history of tariffs not causing a bear market in Trump’s first term. We also have decades of market history showing tariff debates throughout the world aren’t automatic recession triggers. Scope, scale and the degree of surprise all matter.

Note, too, this interesting twist: The negative market reaction to all this is predominantly outside the U.S. Our markets haven’t really seen much net movement so far. But tariffs, should they happen, would affect the U.S. economy and our trading partners, especially when you consider that global developed markets tend to be highly correlated in direction. U.S. markets hear the same chatter, see the same warnings, and price in the same information. 

Sam Stovall, chief investment strategist at CFRA Research, had this observation. “We really don’t see anything on the horizon right now to upend stocks, but investors are always sort of looking around to see what could cause the trend to end.”

Additionally, Bank of America economist Aditya Bhave has written, “Although we expect goods tariffs to roughly double on average by early/mid-2026, we think the resulting economic drag will only be modest. In fact, our 2025-26 growth forecasts are above the Bloomberg consensus. But we also think the benefits of tariffs are overstated.”

Wage growth has outpaced inflation for 18 months. Prices won't go down, but wages will likely increase enough to offset the higher prices. We’re also on a 47-month streak of net job creation in the U.S. When more people have jobs, more people have money to spend.

Fundamentals have kept pace as the stock market has gotten less expensive over the past couple of years because of earnings growth…and earnings are expected to keep growing, too.

Be patient, stay calm, and assess the situation with a cool head. If tariffs go up to the point of bearishness, your window to act probably won’t be just two seconds. You’ll have time to think cooly, calmly, and objectively. Reacting to headlines in the heat of the moment is never a wise move, whether you’re reacting to allegedly good or bad news. Patience, wisdom, and a nicely diversified portfolio, not gut reactions, are your best friends here.

In any case, until these issues are settled, any comments, “insights,” “stocks to buy now,” and the ever-popular “how to trade the tariff news” articles are just speculation. 

Michael Maehl is a retirement income specialist and Spokane-based senior vice president of Opus 111 Group LLC, a financial services company headquartered in Seattle. He can be reached at 509.944.1790.