Advisors may be watching the war, but market's tariff troubles remain

With all that’s been going on lately with the war in Iran, advisors and investors have understandably taken a break from the tariff tiff between President Trump and the Supreme Court to focus on other things.

Not to worry. It’s still hovering over the market.

The big question is what, if anything, they should do about it.

Last month’s Supreme Court ruling striking down key tariffs imposed under the International Emergency Economic Powers Act has introduced a new layer of fiscal and market uncertainty. A recent analysis by the Committee for a Responsible Federal Budget recently said the loss of roughly $1.7 trillion in projected tariff revenue through 2036 could push the U.S. national debt to $58 trillion, or approximately 125% of GDP, if current spending trends continue.

In response, the White House has temporarily invoked Section 122 of the Trade Act of 1974, imposing a 10% emergency tariff that could rise to 15%. In the meantime, a coalition of states has filed suit to block the new tariffs.

With tariff policy now facing legal and political uncertainty, advisors are ascertaining which parts of client portfolios might be most sensitive to these developments.

Josh Strange, president and founder of Good Life Nova, for one, says consumer discretionary and staples that are built internationally should likely benefit from the ruling. In his view, international stocks have some upside due to removing trade protections but could be negatively impacted by the Fed keeping rates higher for longer. 

“The biggest story in my opinion though is around the debt. The higher percentage of GDP the debt, the more yield investors are going to demand to invest in treasuries and all long-term bonds. This would likely result in lower multiples on equities and have a real trickle-down effect,” Strange said.

Along similar lines, Rafia Hasan, chief investment officer at Perigon Wealth Management, believes the parts of the market most likely to feel the greatest impact are internationally exposed equities and tariff-sensitive businesses.

“For companies, the biggest issue is not simply whether tariffs go up or down, but the uncertainty around policy itself that we have been experiencing consistently over the past year. That particularly tends to weigh on companies with global supply chains, imported inputs, or heavy export exposure because it makes planning, pricing, and capital investment more difficult,” Hasan said.

WHAT ABOUT THE REACTION IN RATES?

Perigon’s Hasan points out that the U.S. collected about $166 billion under the challenged IEEPA tariffs, while the federal deficit was $1.78 trillion. This means tariff revenue offset less than 10% of the annual deficit. In other words, although tariff revenue helped at the margin, it did not come close to solving the deficit problem.

“From an investment perspective I believe the impact on treasury yields is less concerning though it certainly doesn’t help the overall fiscal situation,” Hasan said.

Similarly, Malcolm Polley, director of strategic market analysis at Stratos Investment Management, says the potential loss of tariff revenue doesn’t really impact his portfolio planning because it doesn’t really make much of a dent in the deficit. The bigger issue, in his view, is that continuing large deficits contributes to a growing national debt, which is putting pressure on the perceived credit worthiness of the federal government. This may mean that longer-term Treasury rates may be higher than they may otherwise be if the national debt was smaller.

“The amount of tariff revenue received, and the current and expected future national debt don’t necessarily impact where we might position clients as that has more to do with the shape of the yield curve as well as client needs and risk profile,” Polley said.

Polley also points out that the one constant about tariff policy is that it has seemed to change almost daily. In the just over a year since President Trump took office there have been 56 announcements or changes and modifications of tariff policy – including the February 20th Supreme Court ruling that struck down the largest number of tariffs established under the International Emergency Economic Powers Act or IEEPA.

“To the extent that tariff policy negatively impacts the value of the dollar, it might make some sense to shift more exposure to international investments. This is because while dollar strength has traditionally been a drag on international equity returns, dollar weakness should have the opposite effect. That said, increasing exposure to international investments can’t eliminate market risks," Polley said.