What Are Tariffs, and Will They Affect Me?

Speaker 1 (00:00):

So how much impact will tariffs have on your portfolio and your wallet? Some experts estimate the average cost of goods per household will go up 800 to $1,200 per year in the United States, and many investment professionals, however, are estimating that tariffs would have a modest effect in the stock market. One company estimating a 5% decline in the stock market as a result of tariffs. So should you make any changes in your portfolio? Well, we say if you are already allocated properly according to your risk tolerance and your situation, we say no. Our take is to stay the course, stay diversified and keep a long-term view. 

Speaker 1 (00:52):

Hello everyone. Welcome to the Retirement Power Hour. This is episode 37 and today we are talking about tariffs. Obviously, tariffs have been in the news a lot lately. You've heard announcements that President Trump's proposed tariffs on Mexico, Canada, and China. Some have already happened. As of the recording of this video, a lot has happening and this video may get outdated fairly quickly, but we wanted to bring you some information about tariffs and whether or not they should cause you to be making any changes in your portfolio. So we're going to jump into all of that today. Don't forget to go to retirement power hour podcast.com. If you have questions about this, leave them on the website or click work with me and we can schedule a call and talk more about this and its impact for you specifically. But first, let's jump in. What is a tariff? 

Speaker 1 (01:42):

I'll read you the definition of a tariff. A tariff is a tax charged on goods imported from other countries. The companies that bring the foreign goods into the country pay that tax, and typically these tariffs are expressed as a percentage of the total value of the goods that are imported. So you'll hear a 10% tax, 25% tax. We'll talk about that is how these tariffs are expressed, and a lot of times the companies that pay the tax end up passing that added cost onto the end consumer. So something that maybe they imported previously for $10, if there's a 10% tariff on those products now, now they're paying $11, they pass that additional cost onto the consumer and that is causing a lot of the anxiety for consumers and investors around tariffs around how's it going to impact my wallet and also is it going to affect the earnings of the companies that I'm invested in because now they have to pay more money to bring in and import goods into the United States. 

Speaker 1 (02:48):

So let's talk about where we are with tariffs. What has happened as of the recording of this video and what has not happened yet? Let's first start with China. A 10% tariff was imposed on China, and I'll just read this to you, took effect on February 4th. President Trump then said shipments of less than $800 would be exempt from these tariffs. Then China retaliated with its own tariffs that took effect on February 10th, 2025. This included a 15% tariff on US coal, on liquified natural gas products and a 10% tariff on crude oil, agricultural machinery and large engine cars. China has also repeatedly said that they are opposed to a trade war with the United States, so you've got that happening with China. Then we move on to Canada and Mexico for that matter. But Canada, a proposed tariff of 25% on all goods imported from Canada was due to begin on February 4th, but has since been delayed. 

Speaker 1 (03:53):

President Trump has come out again recently and said that these are going to go in place March 4th, 2025. So we'll see. There was a 30 day delay. Canada also announced and then paused its retaliatory tariffs of 25% on about $107 billion worth in US dollars of US imports. So we're in a holding pattern as far as Canada goes. And Prime Minister Trudeau has said that Canada was implementing a 1.3 billion border plan to try to add new choppers and technology and personnel to the US Canada border to try and stop the flow of fentanyl into the United States. So that is still playing out. And similarly, you have a very similar situation with Mexico where we had 25% President Trump proposed a 25% tariff on goods imported from Mexico, which has also been delayed a month. The Mexican president, Claudia Scheinbaum, has agreed to send 10,000 members of the National Guard to the US Mexico border once again to try and prevent the trafficking of drugs in particular fentanyl. 

Speaker 1 (05:13):

So that is also in a holding pattern. We will see how these things continue to play out. But the real question again comes back to you are a consumer. How is this going to affect your wallet? You're an investor. How is this going to affect your portfolio and really should you be making any changes to try and lessen that impact? Well, I wanted to give you some perspective on what some large institutions, some different economists are saying, and there are a lot of opinions about the effects of tariffs. Should you listen to any of them? Probably not want to know why. Go back and watch our last episode on the 2025 market predictions where we talked about what actually the previous year with 2020 fours predictions and how wrong they were. Or you can watch the same topic video from the year before that or the same video we did the year before that. 

Speaker 1 (06:08):

And you'll see that absolutely no one knows what the future holds. And we believe very strongly that successful investing is about implementing the fundamentals of investing, not trying to out guess the market and guess the outcome of these unknown future events. But with that, let's give you some context on what different financial institutions and individuals are saying. And the first I want to talk about is from pimco. PIMCO has a podcast that you can go listen to called Accrued Interest Podcasts on Spotify and Apple. And one thing I actually liked about that podcast, a couple of things I took from it. First, is that there is a knee jerk reaction to tariffs where everyone thinks that tariffs are automatically going to be inflationary, but there are a lot of nuances to how tariffs work. And a point that was brought up in the podcast by the guest on the show is that tariffs are usually used for one of two reasons, either a bargaining chip or a battering ram. 

Speaker 1 (07:14):

And the market is trying right now to figure out what President Trump or how President Trump is trying to use these tariffs and what the strategy really is. And they are betting that tariffs are being used as a bargaining chip, a way to improve the trade position that we have with our big trade partners. So that would be one way. Now, if you're using tariffs as a battering ram, then that's a different story. Now you're out to punish another country or an economy or one of your enemies. And in the market right now is leaning the opposite way. But of course President Trump is not going to say, Hey, I'm just using this as a negotiating tactic because as soon as you let everyone know that the effectiveness of that strategy basically dissolves. So this has caused a lot of uncertainty in the markets. And uncertainty itself is another factor that you have to price in both with equity markets and interest rates and the Fed and whether or not the Fed will cut rates or raise rates, uncertainty does play a factor into that. 

Speaker 1 (08:22):

So what is the takeaway in all this? Once again, it is quit guessing. It's not possible to guess or we can guess, but to accurately predict the outcome of these future events, it's just not possible. There's too many unknown factors that we don't know about. Moving on to another opinion in terms of what would tariffs do to the stock market. We look at an article from Northern Trust who thinks that tariffs again will be more temporary and they're more in the bargaining chip side of the fence. And lemme just read you their comments directly from their article. We see the tariffs as a negotiating tactic rather than a long-term strategy similar to the approach that was taken during the first Trump administration. We think the objective is to leverage these tariffs to achieve more favorable trade terms rather than maintain them indefinitely. So that's what we just talked about. 

Speaker 1 (09:18):

Additionally, the upcoming Canadian elections create uncertainty about the long-term stability of any agreements reached, making it less likely that tariffs will be a permanent fixture. So there you have another party that thinks that these tariffs, again, will be short-term in nature as opposed to sustained for a long period of time. Next, we have Goldman Sachs and they've given their opinion on how tariffs might affect the market. And they say for the stock market, for every five percentage point increase in the US tariff rate, it's estimated to reduce the s and p 500 earnings per share by roughly one to 2%. When you take all of that and calculate all that together, their models at least show the s and p 500 could decline 5% in the near term. If the US has sustained tariffs, in other words, they stay in effect for a longer period of time. 

Speaker 1 (10:11):

If the tariffs end up being short term, then the net effect on the market would be even less than that 5% draw down. So once again, you think, okay, this provides some context at least on what some people are thinking. Is there going to be an impact or could there be? Sure. Now you're getting an idea of some of these players are thinking. Next, we have an article from money.us news.com, and I'm going to read a quote from Cliff Ambrose who is a federal retirement consultant and founder of Apex Wealth. Another wealth management company says that while tariffs can influence market conditions, it's generally not a good idea to make drastic decisions to your investment strategy based on short-term policy shifts. And he goes on to say, tweaking your strategy too often can result in poor timing of decisions or increased fees even from frequent trading. 

Speaker 1 (11:10):

So we've got another person saying, don't try to out guess this, don't jump in and jump out. It's more than likely going to lead to a negative long-term result. Moving on, we've got a couple more opinions. So another opinion. This one comes from a financial post article. How will tariffs impact the market? What should investors do? Behavioral finance firm, Oxford Risk research and analysis shows that knee jerk emotional reactions to market swings cost investors an average of 3%, 3% per year in returns. And the company predicts that this year could be the perfect storm with some of the uncertainty that we're experiencing. Could be the perfect storm for investors to do just that. Have a knee jerk emotional reaction and miss out on returns in the market. So we don't want that to happen for you. And 3% per year is a huge difference. In the long run might not sound big, but it is a huge difference. 

Speaker 1 (12:11):

Invesco just continuing on another financial institution says that for the vast majority of investors, that means stay calm, diversified, and carry on. And I love that. Stay calm, diversified, and carry on. That was their summary of everything that's going on where tariffs are concerned and a great takeaway I think as well. Lastly, I wanted to include JP Morgan. Now again, some of these Goldman Sachs, JP Morgan, if you watched our last podcast, you might say, Joe, why are you telling us what these companies said you just shared on the last podcast about how their predictions in the market were so wrong? Yeah, like I said, should you listen to any of these? Should you base anything off of what people say is going to happen? Probably not. I'm just trying to give you some context around what people are saying here. But we always believe the best strategy is to create your plan, your retirement plan, your financial plan, create an allocation that is based around your situation and your risk tolerance, and then maintain that. 

Speaker 1 (13:20):

Stick to that despite what you're hearing in the environment. So anyway, I'm going to give you JP Morgan's thoughts here. We expect US equities to continue to outperform the rest of the world in 2025, despite tariffs, despite their impact as they go on to say, now that's all how tariffs could affect the stock market. But a lot of people just want to know how are tariffs going to affect my wallet, how much I pay at the grocery store, how much I pay for my vehicle? There could be an impact there too. I said in the opener that there have been estimates where the cost per household per year show that the cost could go up 800 to $1,200 per year. And that's coming from Axios who estimated $830 of increased cost per household per year. And then the Peterson Institute for International Economics estimated that tariffs would add $1,200 per year in increased cost to every household in the US on average. 

Speaker 1 (14:23):

So we'll put links to these studies in our show notes where you can go and read more about that. But again, these are estimates. You have to be ready for many different kinds of risks when you talk about investing and when you are planning your own budget. You don't want to leave yourself no room. Ideally, if you are not retired, you're putting money away, you're saving money for retirement, you have an emergency fund, a solid foundation, you always want to be in strong position because if tariffs do happen and there is a short term increase in cost, you want to have time to be able to adjust. So leave yourself in margin of safety. Don't spend more than you make. Don't rack up a bunch of high interest credit card debt and not have any room to kind of recover from something that may throw you off. 

Speaker 1 (15:12):

Again, in the context will affect some more than others, but that's at least something for you to go off of when you talk about how much these could affect your normal expenses. So should you worry about tariffs? Well, worrying as a strategy by itself has a 0% effectiveness rate. It will get you nowhere. It will certainly not help you progress and move forward. Now, should you be diligent? Yes, as always, should you build a portfolio or have someone build a portfolio for you that can address many different types of risks, both known and unknown? Yes, as always, should you be making any changes right now, like we talked about, if your portfolio has already been set up in such a way, then no, just because of tariffs alone, we don't think that should cause investors to make changes automatically to their portfolio because of what we're hearing about tariffs. 

Speaker 1 (16:14):

Again, the key is to invest according to your risk tolerance and your retirement timeline. So how do you invest toward your situation or your risk tolerance? Well, you have to ask yourself a couple of questions. First, what is the maximum decline that I could emotionally withstand in my portfolio? And second, when am I going to need to use the money in my portfolio for living expenses for retirement? How far away is that point? How much time do I have? And the answer to both of these questions should give you a really good idea of how you should ultimately be invested. Do you need a lot of money in the short term? Well, you should probably be more conservative with that money. Can you not take more than a 15% decline in your portfolio? Well, you better go very conservative if that's you. So knowing the answer to both of these questions will tell you exactly how you need to invest according to your own situation. 

Speaker 1 (17:12):

So once again, as always, go to retirement power hour podcast.com and click work with me where you can schedule a call and we can talk about these things and talk about your situation. If you haven't put a financial plan together or a retirement plan together and you don't know how much money you're going to need in the short term and the midterm, or what does short-term even mean? What does midterm even mean? You've never seen an actual plan and you don't know if your allocation matches up with that plan, schedule a call and we'll take you through all of that with one of our advisors from our advisory team. It'll start with a very open discussion to see if we can help you. Again, retirement power hour podcast.com, and you can also leave us a review. We'd very much appreciate if you can take a minute or two to do that if this material was helpful for you. With that, we appreciate you tuning in to the Retirement Power Hour podcast. It'll be help listeners invest wiser and retire better. Take care.