This week I thought it would make sense to write about tariffs given all the coverage in the news. If you’re trading stocks pretty regularly, then the turbulence can be scary. But if you’re long the U.S. stock market, then you’ll continue to dollar cost average and actively seek out undervalued opportunities, leveraging daily insights from UVstocks.io.
“We don't prognosticate macroeconomic factors, we're looking at our companies from a bottom-up perspective on their long-run prospects of returning.” — Mellody Hobson
Tariffs 101
In my conversations with people about how tariffs are hurting their stock portfolio, I’m realizing that there’s confusion on what a tariff is.
A tariff is an added tax on imported goods. An important distinction is that a tariff is paid by the company that purchases the goods (e.g., American companies), not by the producer of the imported goods. The import taxes are paid directly to the U.S. government.
Tariffs are helpful when encouraging companies to buy their materials through local producers instead of importing them. The idea is that buying locally would be considered more cost effective than buying imported goods with a tariff. This would be true if demand is met by the local supply, which isn’t always the case.
Take sugar for example, a commonly used ingredient in almost all processed foods that Americans consume. The demand for sugar in the U.S. is more than we can produce, requiring American companies to import it from all over the world.
A tariff on sugar results in a price increase of that imported good. With no option to produce our own sugar to meet all the demand, American consumers end up absorbing the extra cost by paying higher prices. Picture this happening far beyond sugar, affecting all imported materials and manufactured goods—the stuff we rely on for everyday consumption from groceries to gas and everything in between.
A real-time example are the tariffs on crude oil imports from Canada and Mexico. This will lead to higher gas prices, which in turn raises transportation and production costs across the board. So “buying local” wouldn’t be cheaper after all.
Consequently rising inflation—or at least sticky inflation—is likely in our future, which is why the stock market is taking a hit. The market tends to react negatively to the prospect of increasing inflation. Money starts flowing out of stocks and into bonds.
Here’s how inflation can prompt a recession. If inflation gets too high, the Fed will raise interest rates to slow spending. Businesses will borrow less and invest less in growth. Consumers will spend less, which could trigger businesses to have layoffs. As a result, the economy slows down, leading to a recession.
The S&P 500 has cycled through many ebbs and flows, up and downs, peeks and troughs. But one thing that has been certain throughout all the uncertainty over the decades is that the stock market always picks itself back up and keeps moving onward and upward. Stay the course.
“Somewhere between the bottom of the climb and the summit is the answer to the mystery why we climb.” — Greg Child
P.S. I'm sharing some investment information, but it's important to remember that what I'm providing is for informational purposes only and should not be construed as financial advice.
Happy Investing,
John
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