What Now? Tariffs, Markets, and Volatility: What Investors Should Know
By Brian Andrew, CFA®, Chief Investment Officer
Friday, the 20th of February, the Supreme Court ruled that the tariff infrastructure put in place in 2025 using the International Emergency Economic Powers Act (IEEPA) rules was invalid. Because the Court’s ruling only blocked this one method of levying tariffs, the tariff infrastructure in place will not fall apart. Subsequently, the President enacted new tariffs of 10 and then 15% using a distinct set of rules under Section 122 of the Trade Act of 1974. These only last 150 days, though, without Congressional action. This section does not require investigation so the President’s actions can be immediate.
The Trade Act has other provisions tied to national security, country specific or discriminatory trade practices that allow for tariffs to be levied.
The Constitution provides Congress with the ability to levy tariffs and taxes, after World War II, Congress began to give some of that power to the President, then to lower tariffs. This President used that executive power to raise them.
Specifically, before the Supreme Court ruling, the effective tariff rate in the U.S. was near 15%, up from 3% at the beginning of Trump’s term. With the new ruling they drop to 9% if the Section 122 tariffs are not ratified.
Suffice it to say, there are many other ways tariffs can remain in place. So, what is an investor to do?
Inflation
The primary reason we worry about tariffs is their impact on prices. When a tariff is levied, on a foreign good a tax needs to be paid by the company importing that good. They have two choices, absorb it and by so doing, reduce their operating margins and perhaps their earnings (stock prices are just a reflection of future earnings), or pass it through to the consumer of that good, thereby raising prices.
Investors worry then about the potential for higher inflation, prices rising, or a reduction in earnings.
Higher inflation would cause the Federal Reserve to leave interest rates higher for longer. That’s good for bond investors who will earn more interest. However, it means a higher cost of capital for those companies and individuals borrowing money. Mortgage rates, for example, would remain higher for longer, putting a damper on the housing market’s ability to recover.
Companies who have already absorbed higher costs might start passing along the added tariff cost to consumers or their business customers. This increase in prices has the potential to impact earnings growth. With the stock market at already high valuation levels, this concern could create volatility or cause investors to reduce their future expectations for that growth and lower prices as a result.
After Friday’s announcement, and investors having the weekend to digest the news, the immediate reaction was a sell-off, though the market has been trending lower for several weeks. Keep in mind, that some industries will be more affected by this than others. In a diversified portfolio, the impact should be nominal. Though it is important to keep in mind that investors’ initial reaction to this kind of news is to sell everything, then sort out the details over time.
This is where we might find an opportunity to buy assets at temporarily depressed prices and take advantage of the volatility the ongoing tariff saga creates.
One thing is for sure. This President believes strongly that tariffs can be a valuable tool for making trade deals and foreign policy. He also has a Republican-controlled Congress that generally agrees. We understand that this is a mid-term election year and that control may not last, however, the President understands that as well and might use those other Trade Act powers to keep the tariff infrastructure in place.
We will listen to companies earning announcements for signs of how they are dealing with the cost and watch consumer sentiment to determine if inflation expectations are rising. Along the way, using the volatility in markets to find opportunities.