In light of recent tariff and geopolitical events, we’ve decided to begin publishing a short piece every Monday to discuss what we think we will be doing to navigate the recent crash and eventual recovery. In this series, we'll briefly cover key developments and how we plan to be responsive in our client's portfolios in the week ahead. We have a history of being both supportive and critical of any politician or perspective, so the commentary below not intended to be a comprehensive statement or endorsement any politician, candidate or platform. Please be aware that we will need to avoid publishing certain details for compliance purposes, but are happy to discuss any of the comments with you in the specific context of your account.  

We manage the account on your behalf.  That means that we are making adjustments, increasing/decreasing cash & cash investments, making portfolio decisions and carrying the stress of market turmoil on your behalf.  We love to hear from you about your needs (and feedback), but please don’t feel the burden of managing your portfolio.  Obviously, this note is for client’s of CoCreate, if you’re not a client of our firm consider reaching out to see if we can help you enhance the way your accounts are performing in this environment.

Also, publishing about the week ahead is a difficult task and some or all of the things we say may change or play out completely differently than we expect.

A few notes about last week’s events:

• The stock market crashed rapidly last week on news from the Whitehouse of a 10% minimum tariff and a “reciprocal” tariff which wasn’t reciprocal in any way shape or form.  While we strongly believe in free trade, we can comprehend the thought process behind implementing specific tariffs as a form of sanctions (i.e. the border tariffs) or using them as a targeted negotiating tool (targeted meaning country by country or in the truly reciprocal sense). Even in the most appropriate cases, tariffs aren’t great for the global/American economy, but arguably are/aren’t worth a small sacrifice.  What the Trump administration had been discussing in public prior to April 2, fit these two broad categories.  What was rolled out was very different.  Aside from the 10% broad-based tariffs, the administration announced a punitive tariff based upon the trade deficit with the given country.  In a global economy, the wealthiest countries consume the most goods, so they import more than those countries who have less.  Those countries benefit from the increased manufacturing and the US consumers benefit from additional goods at lower prices.  Somehow the President thinks that the trade deficit equates to unfair trade practices, which is a completely incoherent principle.  Because the tariffs were so broad and unpredictable, preparations made by market participants were largely miscalculated.  We believe that we were comparatively well positioned, but will continue to make ongoing adjustments as the situation develops.
• The implications of the tariffs imposed as-is are meaningful.
  • The effect on GDP could be about -1.5%.We could see inflation growing an additional 1.5%, but prices must increase relative to the tariff on the specific goods and may be larger in the long run.Businesses need to manage their profit margins considering higher costs and continue to sell to a customer who has less to work with.  Business investment will decrease beyond resolution of the tariff situation.For those who share my faith-perspective, we should be very concerned about the implications of these tariffs on the world’s most vulnerable populations.  Jesus clearly stated that what we do to them, we are doing to him.  These policies (whether or not you agree about their efficacy), subject many around the globe to even more extreme poverty.  It is obvious cause-effect that unfair labor practices will increase in an effort to manage cost controls.  We can also expect to see an acceleration of both supply and demand sides of the global slave trade.  For anyone who professes faith in Jesus, we cannot accept this type of collateral damage simply in the name of prosperity.
  • The good news: While I am no constitutional law expert, I firmly believe these will be stopped by the courts.  The power to impose tariffs belongs to congress under the constitution, but was delegated to the president in several pieces of legislation. 
    • The President is able to impose tariffs in the interest of national security (think fentanyl & cartels/foreign gangs), but does need to meet certain requirements (Trade Expansion Act of 1962 Section 232). 
    • Section 301 of the Trade Act of 1974 permits the US Department of Trade to respond to a country that is engaging in activity that is either violating a trade agreement or engaging in an unfair trade practice after completing an investigation. 

Nowhere is a president granted the authority to set arbitrary tariffs or to create sweeping tariff policy in absence of Congress.  Moreover, a president must demonstrate that their actions have some form of intelligible principal when asserting the authority delegated by congress.  While specific tariffs do fall within President Trump’s purview, the 10% minimum tariff for all countries certainly does not appear to meet the criteria set forth in the Act(s).  The broad implementation and method of determining reciprocity make plain the President’s intent was to implement actions that belonged to Congress.  Lawsuits have already been filed even by conservative groups.

• More Good News: unless this surprises the world and begins to work quickly, it’s political suicide.  More and more members of congress will be looking at their next election as the days and weeks progress and it will only be a matter of time before enough votes gather to restore free(er) trade.  Until then, Conservative politicians face an uphill battle with major donors, constituents, and regular voters who are hurt by the tariffs.

On to this week’s playbook

Most weeks will have a shorter preamble… I hope!

With the intense amount of selling last week across all sectors, there is a growing likelihood we will see some sort of a bounce in market prices this week.  Expect us to be watching for this as an opportunity to further mitigate risk exposure in each client portfolio.

• We were prepared well for the projected reciprocal tariffs and had recently made adjustments to a number of specific holdings.  We had also increased our cash/cash equivalent balances to an average of about 18%.  We feel that an appropriate target for cash levels is probably between 20%-30% given the current state of affairs.  We also want to continue to collect rising dividends throughout a bear market if one comes.
• We are reviewing each investment’s specific risk exposures under the new tariff policies to determine the outcome for the investment’s financials and dividend-payout, valuation, and position among it’s competitors.  We do a similar evaluation at least on a monthly basis, but special circumstances warrant special consideration.
• We will patiently wait for the key information necessary to determine the long-term direction of the current market moves.  Will this recover on policy change/intervention or will we see continued declines in market prices?  We will be preparing specific actions on all of the potential outcomes we can foresee as soon as the time is right.  Reacting too quickly often exacerbates a risk rather than mitigating it.
• Expect to see more differentiation in transactions between taxable accounts and tax-deferred accounts.  In tax deferred accounts, we can exchange from one investment into another simply because it is more attractive, but in taxable accounts we have to consider if the change is worth it in light of the tax liability it may cause. In taxable accounts, expect us to use this opportunity to harvest tax-losses to offset capital gains where it makes sense.  This will produce some out-performance because of tax saving opportunities.

I hope you have found this insightful.  Many of these missives will be much shorter in the future, as we’ll have less to catch up on.  We double down on commitment to stewarding your investments and financial plans with diligence and integrity when the economy and markets are turbulent.  Thank you to all of you who have trusted us to do so on your behalf.