TLA continuously researches and monitors economic and market trends on behalf of the families we serve.
Tariff Policy
Days after our last “Weight of the Evidence,” the president announced his long-threatened, yet still controversial, heightened tariff policy. Not long after that, he reversed some parts of his policy and suspended other parts. Still others are being challenged in the courts. In my 44 years in this business, I don’t recall any one government policy that has introduced more uncertainty for businesses and consumers.
While no one expects guarantees, business decision-makers need a certain amount of policy predictability in order to make current employment decisions and future capital decisions. The current uncertainty creates a major challenge to decision-making. Many appear to have hit the pause button because they don’t know what the rules will be going forward.
Investors, on the other hand, after an initial jolt, seem to have become more desensitized to the tariff headlines over the past couple of months, with both U. S. stocks and bonds in somewhat of a trading range.
Historically, U. S. trade agreements have typically taken 18 months to finalize. While this president prefers to make deals quickly, the recent tariff policy reversals and delays, along with the court challenges, may mean that our international trading partners now have less urgency to cut deals and may have been encouraged to slow negotiations.
Supporters of higher tariffs look back at the trade agreements the president made in his first term as positive, or at least benign, in economic terms. The negotiations may be more difficult this time due to the administration’s rationale for the tariffs. Last time, the simple rationale was that other countries were “taking advantage of us” and needed to be corrected. This time the president campaigned that tariffs were also needed to a) punish other countries for facilitating the importation of fentanyl over our borders and b) to reduce the deficit. While we’ve heard less about those two arguments recently, holding to those beliefs may make compromise more difficult.
The overwhelming consensus among economists is that higher tariffs, like any higher tax, create economic distortions, reduce disposable income, and discourage investment. Indeed, the Bloomberg consensus of economists recently lowered their estimates of 2025 global growth in part due to the trade war between the U.S. and China.
Better Than Expected
Good news #1– So far this year, the economy has remained relatively resilient. Is that due to the consumer (still generates 70% of the GDP) “front-end-loading” purchases ahead of potential higher prices? Only time will tell.
While the disparities between the wealthy and the poor are significant, the household sector of the economy has never been richer. Households collectively have $160 trillion of net worth, including homes, stocks, bonds, mutual funds, retirement plans, and investment real estate.
Good news #2– While inflation remains sticky, it has not taken off, as some expected. Smart and flexible U. S. importers pivoted away from China toward the rest of Asia, particularly India, Taiwan, Vietnam, Malaysia, Singapore, and Indonesia, for products. As we’ve learned from recent headlines, there are many products that still must come from China, like rare minerals and certain items for communication and defense. So, once again, time will tell whether inflation can drop to the Fed’s goal of 2%. Until then, the Fed prefers to stand pat while it awaits more evidence on tariffs and inflation.
Housing Slump
One area of the economy that we’ve had our eyes on is housing. Cracks in the housing foundation are starting to widen. Home builders are reporting higher costs for materials and labor. The National Association of Home Builders recently said that sentiment from their members sank to the lowest level in 3 years. Homebuyer demand is now lower than supply, while elevated mortgage rates keep homes prohibitively unaffordable for many, so homebuilders are slowing construction. As we all know, the key to real estate is “location, location, location.” Two of the hottest markets since the COVID-19 pandemic have been central Texas and southwest Florida. Those two areas are now showing recent homebuyers “underwater,” which means that homes in those areas may now be worth less than the mortgages still owed on them.
Source: Redfin
Why is this important? The U. S has experienced an exorbitant increase in housing prices over the past decade compared to inflation. This has bolstered personal balance sheets, giving consumers confidence to spend. A reversal of this trend could impact consumer spending. Plus, some 5% of the nation’s jobs are directly related to the growth in the housing sector. Far more jobs are indirectly related.
Still Defensive
Unless tariff rates return to the more moderate levels we’ve seen over the past 50 years, somewhat higher inflation is more likely to be delayed rather than avoided. Any tariff-related drag on earnings, coupled with today’s elevated equity valuations, stubborn interest rates, and heightened geopolitical risks, creates conditions for less risk-taking, not more.
The speculation we have referenced in previous newsletters has not abated. Historically, widespread speculation does not end in soft landings. Think of oil and gas investors in the early 80s, junk bond investors in the late 80s, and dot-com investors around the millennium. Keep in mind that none of them viewed themselves, at the time, as speculators. They were more scared of missing out (FOMO) than recognizing the risk involved. We also see U. S. equities as still among the most expensive in the world. While many others abandoned their allocation to international equities, we are glad we did not because they have been outperforming U.S. stocks by a wide margin all year.
As we continue to take advantage of opportunities we see, prudence tells us to remain defensive by staying broadly diversified and by “buffering’ to mitigate downside risk where we can.
– Andrew T. Gardener, CFP®