Liberation Day

I’m not sure if “Liberation Day” will end up being a Hallmark holiday someday where cards are sent to family and friends, but for sure it will be remembered in American history.  Liberation day, April 2, 2025 was the day the US put tariffs on 185 countries to free ourselves from “punitive trading partners” and allow the nation to dictate to the World how the trade order will work.  Our goal in this article is to discuss the issues and the possible scenarios, and what it could mean for an investor.

If we go back to the 1960’s, we found that the US was the center for manufacturing and goods production.  Economists still argue why, but the reality is post-World War II, the manufacturing capacity in the world was in tatters, Germany was split into two nations, China wasn’t even on the map, economically speaking, and Europe was still rebuilding from the war on its soil.  The US flourished.  Small towns all over America made goods the world wanted – think about the steel mills in the Midwest, furniture in North Carolina, and the list goes on.   This helped create a middle class, and it allowed families to buy homes, send kids to college, etc.  

However, other countries want that as well.   I’ve been fortunate to travel to many countries, and many of them developing nations.   In those countries, every time, I have found that people want what we have and what we strive for.  They want the latest iPhone, they want their kids to go to college, they want their families to succeed, they want Levi Jeans and Starbucks, and very importantly – they are willing to work hard for it. Post the 1960’s, other nations started to produce goods that others outside of their borders wanted and global trade started to flourish.  Economists tell us that the world, collectively, benefits when goods are made with the lowest cost and highest quality possible.  That allows people in other nations to buy them at a reasonable price, and their quality of life improves as they have incremental wealth to buy other items. 

In 1980, the price of a metal Weber Grill was $275, which is over $1,000 today after inflation. However, you can buy that grill for around $275 today.  Why?  It’s made in China and other countries where the cost of labor is pennies on the dollar versus what it is here.  So yes, it’s true that the worker that made the grill in the US doesn’t have a job, but all the other consumers now have more money to spend, save, etc. so as a nation we are wealthier, and there are jobs in other areas.  This is what globalization is and has been for decades. Unfortunately, there are people left behind that had to move on to other jobs and fields.  Also, automation and more efficient processes have also led to many losing jobs – not just from making good overseas.

There isn’t an economist in the world that thinks all of a sudden with tariffs, we will start making low-cost goods again in the US.  A lot of those jobs are gone for good and we should be honest with those people feeling the pain rather than promising them green grass in the future.   

Tariffs are simply a tax and a barrier.  There is some history around this.  Almost 100 years ago, the US tried this with the Smoot Hawley Tariff Act. With this piece of legislation, the tariff rates went over 40%.  Of course, that prompted retaliation from Europe and other nations and a trade war ensued. This act was one of the causes of the great depression as it isolated the US from it’s partners and the rest of the world.  Today, the world is a lot more intertwined with global trade.  When Boeing makes a plane today, over 20 countries participate in the parts that make the American plane…there are countless examples of this.  If Boeing doesn’t import cheaper parts, and only sources parts and labor here, the cost of the plane will rise.  Either less planes will be bought, or airlines will simply turn to Airbus in France to buy their planes.   We cannot be competitive with other countries when our cost structure is higher. 

Naturally, countries that cheat and steal our intellectual property have to be dealt with, but not all 185 nations (number of nations we just put tariffs on) are doing that.   Also, President Trump only talks about the goods trade deficit.  The reality is 65% of our economy is services (software, finance, intellectual property, consulting), so many nations that have a goods trade deficit, have a services surplus from us, so really we are break even with them.   When Apple makes a phone in Taiwan that is lower cost, more people buy them, which means Apple then sells more software and other services which benefit US workers where the high-tech work is done.  

The million-dollar question of course is what does this all mean for the stock market?  Obviously, there is extreme volatility as the global markets simply don’t like this.  It’s hard to predict business patterns, cash flow, profits, etc when the policies are so erratic.   It’s also very hard to predict winners and losers in all of this.  There will be companies and countries that come out as winners in this, and companies that we don’t know now that get hurt by it.  So you know what I’m going to say…. Stay very diversified!  As a matter of fact, that has been working extremely well in this volatility with international markets, value stocks, etc all holding up well.   Keep in mind also that some of this decline was overdue.  As we’ve talked about for a while, valuations in the US, especially in Tech, etc were at nosebleed levels and so seeing these declines in that space is not a surprise. I know some of you may be thinking to “sit this out” and wait for things to get better.  Markets will react very quickly and swiftly when there is some change or resolution, the risk of being out of the market, for long-term investors, is greater than the risk of sitting through this volatility. 

One of my favorite charts is below.  It shows the growth of a $10,000 investment in 1980, and how much it’s worth at the end of 2024.

The most compelling part of this chart is what happened when you missed the 50 best days out of the 44 year time period shown above.  When those days were missed, 90% of the growth disappeared.  What this tells you is stock market returns are super-concentrated and you have to be in the market to get those days which typically are an outsized part of your long term return. 

 In March of 2020, during the height of the covid pandemic, markets sold off violently, but the investor that held on, had positive gains by the end of that year.   Of course, no one can predict markets, but as this wound is self-inflicted, it can also be reversed and we might see the markets snap back like a rubber band.

Keep in mind the various buckets in your portfolio.  The bonds are there for income, volatility protection and as a place holder for short-term assets that you might need.  Your stocks are for the long haul as they always have been.   I know this is stressful – I feel it too as an investor.  However, keeping your goals and long-term horizon in mind is key.   It’s very likely this market sell-off will end up being an opportunity for investors sitting on the sidelines with cash. 

We are of course monitoring the situation, and as we rebalance and adjust, we take advantage of opportunities like tax loss harvesting, reallocating to equities, etc.  We also understand the great trust you have placed in us, and that is not lost to any person on our incredible team.  We are here to answer questions, we are here to be an ear to talk things through, and most importantly we are here to help guide you for your long-term goals.  Please reach out with any questions.

Raj Chokshi, CPA-MBA-CFP
Partner and Wealth Manager