Day 22: Tariffs: What’s Happening, What Could Happen, and Why You Should Stay Hopeful

365 Days of Learning Investing: Yet another tariff post on Substack

Just like you, I’m trying to understand tariffs and the implications. So, today we’re digging into tariffs: what they’re about, the possible outcomes with some odds attached, and a reason to keep your chin up no matter what. I watched the latest episode of Signal or Noise with Charlie Bilello and Peter Mallouk for this post. I highly recommend that you watch the full video. As usual, their takes are solid and informative. Here’s what I’ve got for you. Let’s break it down.

What’s the Deal with Tariffs?

Tariffs are taxes on goods coming into the U.S., meant to make imports cost more so we buy American. The U.S. is staring at a $1.33 trillion trade deficit with countries like China, Canada, and Mexico sending us more than we send them. Tariffs are the tool to fix that, pushing companies to build here and maybe level the trade game. But it’s not free, as prices could climb. Here’s why they’re in play:

• National Security: Keep key stuff like chips local, not overseas.

• Jobs: Bring back manufacturing, think factories humming stateside.

• Fairness: Other countries tax our goods more, so this could balance things. This is not true, because the reciprocal tariffs are calculated by just dividing the trade deficit by exports from that country to the U.S.:

Possible Outcomes and Their Chances

Peter laid out three scenarios for where this tariff push might go, with some rough odds:

• Worst Case: Full-On Trade War (Less than 10%)
  Tariffs stick forever, everything’s made here, and the world fights back. Result? Big recession, markets tank - S&P 500 could drop 30-40%. Peter says this is “preposterous” and under 10% chance because it’d wreck too much. Not likely, but it’s the dark cloud.

• Middle Ground: Messy Delay (40-50%)
  They aim for a quick fix but drag it out too long. Uncertainty spooks companies, spending slows, and we get a mild recession of 2-3% GDP dip, unemployment ticking up a bit. Peter pegs this at less than half, maybe 40-50%. It’s bumpy, but not the end of the world.

• Best Case: Smart Deals (35-40%)
  Tariffs flex some muscle, countries cut deals fast, and we win better trade terms. U.S. exports rise, jobs grow, prices hold steady. Peter’s optimistic as he is giving it 35-40% chance. This is the gold star outcome: fairer trade, stronger economy.

How Markets Are Taking It

Markets are jittery. S&P 500’s down 15%, international stocks are up 6%:

And the Magnificent 7 are hurting:

Volatility is up as VIX hit 40:

Sentiment’s dark, too, as bearishness matches March 2009 lows:

Good News

Here’s the good news: even if tariffs shake things up, the U.S. economy is strong as there is low unemployment and the Fed’s got room to cut rates. Worst case is slim, and even the messy middle isn’t a knockout. Best case? We come out ahead.

High fear’s a buy signal, as markets climb from here more often than not. After VIX spikes like this, S&P 500 returns beat the average 1 year, 3 years, 5 years out. Fear’s loud, but history says it fades:

Below is the historical top 20 VIX levels, we are not there with 40 just yet. Dips like this let you grab quality cheap. Long-term, stocks win 5 years after big drops, S&P’s doubled every time:

The below table shows that there is always a reason for the market to correct. This has happened before, basically. S&P 500 corrections above 5% since March 2009 low:

Worst case scenario is this will be over in 3.5 years with real damage. But I think we won’t get there, as these tariffs are meant to be used as a negotiation tactic more than anything. My bet is they will be resolved by the midterm elections, in the worst case with mild damage to the economy.

What’s your gut say—best case or bust? Drop it in the comments.

My buys, sells, watchlists and shortlists for the week ahead

I'm thinking about consolidating some positions to make the client portfolios even more concentrated as there are some companies in there which have nothing to do with tariffs. Basically, doubling down on them. If clients add more cash, I might just use that instead.

Also, I'm thinking about using small margin for my personal portfolio. I should have some cash available by July to cover it anyway but not sure if we will have these prices then. I haven't decided yet as I dislike the idea.

I already have a shortlist and a watchlist that I share with the premium subscribers through the Google sheets. Currently, I'm working on another list. I'm sifting through the S&P500 for ideas. I have their historical 20, 10, 5 year multipes and growth rates versus the current multiple and consensus 3 years growth projections. I want to add historical ROICs versus the current ones, some debt ratios before sharing it with the paid subscribers.

Subscribe and upgrade to paid if you want to receive it.

I will probably do the same for Nasdaq 100, Russel 1000 and 2000. And possibly for international stocks.

Another shorter list that I plan to share is made of companies whose stock price and business performance resemble a straight line, in some cases exponential line with 85% fit (R square of 0.85) with high ROICS.