Do Tariffs Spell Trouble for Stocks?

January provided a nice pop for stocks after a rough December. Gladly we rode that wave well enjoying solid outperformance.

Unfortunately, we seem to be in a period with on again, off again results. This volatility seems partially borne by investors with 2+ years of impressive bull market gains prepared to take some off the table. The other catalyst is the Trump administration's foray into new tariffs that may very well spark another trade war like 2018 (which was quite negative for stocks).

Today’s market commentary will talk about tariffs as they most certainly are at the heart of what is moving the market. 

Market Commentary

As shared in the intro, tariffs most certainly are taking center stage in the investment conversation. It is an interesting topic on its own. Plus it could very well be inflationary which brings back the idea of the Fed taking longer to lower rates. Even worse would be a rekindling of inflationary flames that would cause the Fed to...dare I say...raise rates again.

Let’s begin our conversation with what was previously shared in my alert to Zen Investor members on January 13, 2025.

“The market hates uncertainty.

This is not the first time you have heard that...nor the last as it’s one of the truest statements in all of investing.

When the path forward is uncertain investors become more cautious. And that is the simplest explanation for what is happening now which I don’t believe gets cleared up for 3 to 6 months.

In the meantime, the market will become more volatile with a modest downside bias...

Since the Zen Investor is a long term portfolio then we don’t sweat market timing on little swings here or there. We are more focused on the big picture bull vs. bear determination (for which I am still long term bullish).

However, if this was an active trading portfolio where short term timing was important, I would advise to be only 65% long the stock market this time until this uncertainty passes...

Tariffs: What Will Be the Final Outcome?

The more I read this weekend to get my head around current market conditions...the more I realized this is likely the bigger question mark for investors. Truly such a wide range of outcomes because the policies bandied about during the campaign were so outrageous as not to be believable.

The posturing since then has not really softened and thus investors are confused as to how this plays out including the risk of higher inflation (because higher tariffs = higher costs to US consumer). Or trade wars. Or (fill in the blank with a wide range of possibilities).

Let’s imagine that at best this is resolved in the Spring of 2025 with Summer being more likely. Now picture all the headline risks between now and then?

Each salvo from the US or trade partners (namely China, but Mexico and Canada equally important) would have serious ripple effects to the market. Meaning it likely gets worse before it gets better.

In the end I think it will be just fine. John Mauldin shares some insights in his well reasoned piece from over the weekend. You can skip to half way down to the section labeled “The T Word” talking about tariffs.

But do consider reading his entire article as he talks about other reasons the outlook is uncertain (or what Mauldin calls “partly cloudy”). In the end Mauldin is optimistic that all turns out well enough. This is really a vote of confidence in the resilience of the US economy which is often very hard to knock off its axis.

I feel the same. That is why I am still bullish in the long run. But for next 3-6 months the uncertainty discussed above needs to become more certain before the next bull run starts again.”

(End of 1/13/25 commentary on tariffs)

Indeed, we see a prime example of the headline risk on tariffs from the over the weekend start of new levies on our 3 largest trade partners; Canada, Mexico and China. The market did not like that leading to a hefty sell off to start this week’s action.

Just like 2018 I expect this to be an ongoing saga with a mixed bag of positive and negative news on the tariff front leading to volatile market action with likely downside bias. This points to a trading range scenario at best...and more downside at worst for the S&P 500 (SPY):

(Yellow = 50 Day Moving Average / Orange = 100 Day MA / Red = 200 Day MA)

The trading range scenario has a top of the recent highs around 6,100. The lows are a trickier story. Perhaps the 5,800 because of our journey there earlier in January...but that really had more to do with the 100 day moving average now at 5,895. 

That would make for just a 3% range which seems a bit too narrow. This increases the odds that we test 200 day moving average (aka Long term trendline). If we are about to have a repeat of the trade wars from 2018 then pretty likely we retest that lower level now at 5,644.

This should not truly scare any long term investor. Let’s remember that just a couple years back the bear market low was 3,491. That’s a lot of profit stored up in our portfolios that makes it easy to give back a little in this looming pullback/correction.

Our game plan will be to hold on to our best stocks through this trouble knowing that brighter days are ahead. Plus, we are still on the hunt for more quality stocks to add to our portfolio on the way to fully loaded 25-30 positions (currently at 17 stocks).

Thus, we will bring a “buy the dip” mentality to swoop in and buy more long term winners at even more attractive entry prices if indeed a serious correction is soon in hand.

Certainly, there is a lot of economic things going on. And earnings season to boot. But really there is no fear of recession on the horizon and not really part of the stock market equation at this moment.

Meaning we are in the midst of a long term bull market. Probably have another 2-3 years on the clock before needing to worry about any real threat of recession and bear market. So no pressing need to discuss these topics in this monthly edition.

This is just a time to digest the tremendous gains delivered at the start of this bull market. And then wait out the likely volatility that comes with this round of tariffs talks that probably devolves into a trade war like 2018 before coming to a more reasonable solution. 

Meaning that now is a time to use any dips to load up on the best stocks for the long haul. 

What To Do Next?

Discover the Zen Investor portfolio filled with my top stocks for the long haul. 

And yes, each pick is harnessing the full power of the Zen Ratings model which has averaged a +32.52% annual return since 2003. 

With the Zen Ratings on our side, you can appreciate why we have doubled the markets return at this early stage of 2025 with plans to extend our lead in the months ahead.  

If you are curious to learn more, and want to see my current top stocks, then please click the link below to get started now. 

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p.s. 2 new stocks were added on Wednesday February 5th bursting with upside potential. Just click the link above to get access.  

Wishing you a world of investment success!

Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)

Editor of the Zen Investor

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