Hillary Sunderland and Cassandra Laymon tackle the big topic on everyone’s minds…tariffs!

Watch the video as they answer some common questions about the tariffs and their impact on the markets and economy as well as a recap on the past quarter. (Transcript below)

Transcript

Cassie Laymon:
Well, Hillary, it is good to be back with you this quarter. Good to be back with you, Cassie. So we have a lot to talk about today. We do. We usually try to keep these pretty short under 10 minutes and we are going to start off by a quick overview of what happened last quarter, which is something that we do every quarter. But our big topic for today is going to be tariffs. I know it’s what’s on everyone’s minds, we have questions, we want to hear some insights from you, Hillary, and what your thinking is.

So it may be a little bit longer than what we’re used to, but I think really worth the investment of time. And I’m just also going to throw in a little caveat here that it is a pretty complex topic and we all have our opinions about tariffs and sometimes personal opinion might leak in. So we’re going to do our very best to keep this as objective as possible. And I just also want to invite our clients that if you have follow-up questions, we would invite them because whatever is on your mind, we want to be able to speak to that. So, alright, Hillary, let’s just kick us off with a review of what happened in the markets in the first quarter.

Hillary Sunderland:
Yeah, thanks Cassie. So in the first quarter it was interesting, right, because for most of the last three years, investors had bet on US, exceptionalism; US was leading the way in artificial intelligence, economic growth was good in comparison to many other regions of the world. And the US stock market was booming and so a lot of investors jumped on this bandwagon of, well, I should just be invested in the S&P 500, that’s the place to be. But as is often the case that came to an abrupt end in the first quarter and the first quarter really marked a turning point for the markets with capital shifting away from the US and into a lot of international markets.

So just to give you a quick overview of what happened from a market perspective, in the first quarter as shown on this chart, US markets dropped with the S&P 500 index down a little over 4% and small cap stocks were down about nine and a half.

Europe on the other hand climbed. So Germany had a historic spending plan that they rolled out. They invested 500 billion euros into defense and that’s along with the emergence of China as a leader in the tech race with an artificial intelligence program called DeepSeek as well as some stimulus majors of their own really helped boost international developed and emerging markets international developed were up 6.86 for the quarter. Emerging markets up a little over three and fixed income also posted positive returns of two and a half to 3% for the quarter as well.

So the stark divergence in returns between domestic and international stocks just shows how quickly market sentiment can shift and the importance of diversification overall because our portfolios are broadly diversified across the globe, they perform very well versus benchmarks for the first quarter of 2025.

Cassie:
And that is why I am so grateful that we have an in-house investment team who is paying attention to these factors constantly every day looking at it. So we really appreciate that. All right, well we’re going to move on now to the hot topic of late, which is tariffs. Markets have been very volatile. Everyone’s talking about tariffs, but I think it would be really helpful to just take us back to the basics. What is a tariff and why is the current administration wanting to impose tariffs?

Hillary:
Great question, Cassie. So a tariff is really just a tax placed on import of goods. So if we want to take a very simple example, we’ll take steel from China. So if steel normally costs, we’ll just say $10 for the sake of math and we put a 50% tariff on it, that would raise the price of steel from $10 to $15. This would make steel produced in the US seem more attractive to buyers in the idea behind tariffs is really quite simple. If we make foreign goods more expensive, people will buy more American made products and that could help protect American jobs. It also brings in revenue for the government, which is intended to help pay for the tax cuts that President Trump wants to extend at the end of 2025. So the idea is great in theory. In reality, tariffs are a lot more complicated.

So because we have a free market economy, American companies seeing that people are willing to pay higher prices for imported goods such as steel, they will raise their prices as well to match that imported price. And this price increase is often then passed on to consumers, to you and to me, and that can be inflationary.

Higher prices also decrease demand, which does slow economic growth. Tariffs can also lead to other countries fighting back, which we saw just this morning with China coming out with some retaliatory tariffs on the United States. When the US raises tariffs, other countries often retaliate and this can cause a vicious cycle of rising prices, which also then decreases demand and slows economic growth. And so there’s a lot going on here in terms of how tariffs actually play out in reality.

Cassie:
Yeah, well, so if that’s true, why would the administration be wanting to impose these?

Hillary:
Mostly for the reason that they want a way to increase tax revenue so that they can pass more tax cuts at the end of the year. The other idea here is that by increasing the tariffs, perhaps that’ll help reduce our deficits. A lot of our issues surrounding the deficit are due to entitlement programs and a lot of other areas of the economy that aren’t really going to be impacted by tariffs, but it’s also to try to bring back jobs to the US and reshore a lot of those supply chains in the US in order to increase domestic economic growth.

That could happen, but it is a longer term timeframe over which companies can take their investments and redirect them to the United States, build factories here, hire workers. It’s a long process. It’s not something that’s turned around in just a few months, and so there could be quite a bit of pain in the short term while that plays out.

Cassie:
Yeah, yeah, that’s what I was thinking about too. We want to bring all the manufacturing back to the US but we might not be set up for that right now in the short term.

Hillary:
Exactly. Yeah,

Cassie:
Kind of a long-term thinking. So based on everything you’ve shared with us, how much do you think tariffs are going up?

Hillary:
Well, President Donald Trump announced a broad tariff increase. He imposed a universal baseline tariff of 10% on all imports and also higher tariffs on countries with which the United States has a significant trade deficit.

So what that means is tariffs were raised on Chinese goods to 54%. They imposed duties up to 20% on imports from the European Union up to 10% on imports from United Kingdom. And this decision has sparked concerns of a global trade war leading to a drop in financial markets as well as the value of the US dollar.

To give you a visual of this, here’s a chart that looks at the average tariff rate imposed on imported goods going all the way back to the 1930s, and the arrow there is pointing to the estimates of tariffs on US imports after President Trump’s announcement on April 2nd. When this goes into effect in just a few days, we will be at levels not seen for a century, and this is going to have an impact on the economy.

If these tariffs stay as-is for an extended period of time, many countries are likely to end up in a recession. And that again is because tariffs tend to push up inflation and they tend to slow growth. Markets are really struggling to digest the steady stream of tariff threats that we’ve been getting over the news. So we’ve had on, again, off again implementation, we’ve had exemptions retaliations from key trading partners. The news is literally changing by the hour and that lack of clarity makes it really difficult for investors as well as business owners to determine the path ahead.

I think the key question here is really what degree are the new tariffs simply a negotiating tactic designed to encourage countries to work out better trade terms with the United States. The executive order signed by President Trump specifically gives him the ability to reduce the tariffs if a country negotiates or takes other steps to reduce their trade barriers, and that may mean that subsequent announcements could be lower as countries begin to make negotiations and some concessions to President Trump.

However, the across the board 10% minimum tariff appears likely to remain in place for an extended period of time. So really the outlook is changing by the hour and we really have to see what sort of negotiations happen in order to ascertain what the broad impact could be to the global economy.

Cassie:
Well, we knew that there were going to be some announcements on April 2nd, right? So we knew this was coming and then the market, I’m going to be using one of your words, the market tumbled, and so usually when we know something is coming, the market adjusts. And so why did we have a significant drop in the market if we knew that this was coming?

Hillary:
Yeah, that’s a really great question, Cassie. So domestic stocks sold off broadly this week. The S&P 500 is back into correction territory, which is a drop of at least 10% from its mid-February high. Small cap stocks entered bear market territory this week. That’s a drop of at least 20%, and the market reacted so violently because people really misunderstood what the president was referring to when he has been talking about reciprocal tariffs over the last few weeks.

If you look at actual tariff rates at the start of this year, for example, the European Union had an average tariff rate on US goods of 2.7%. Japan was at 1.9, Mexico and Canada, less than 1% each. And so coming into this April 2nd liberation day, if reciprocal tariffs meant that we were going to impose tariffs on these regions of the world in that order, honestly it was going to be pretty small relative to what we’re already doing in terms of tariffs announced on things such as steel and aluminum. It sounded like higher tariffs, but it sounded like it wasn’t going to be a huge escalation.

In the end, the Trump administration used a very different and highly unorthodox way of estimating what sort of tariffs other countries are applying to us. And I don’t have time to get into the mathematics of that for the sake of today, but let’s just say that they use an altogether different scale on which to base tariff rates. And so when the announcement was made on April 2nd, the very unusual way they calculated tariff rates was very much outside of how most economists would calculate it. And this just shocked the markets and it dropped violently as a result.

Also, remember here we’ve had two back to back years of 20% plus returns in the S&P 500 index and stocks were already priced to perfection. And when you have stocks priced to perfection, any sort of setback can cause quite a sharp pullback in the market like we’ve seen over the last two days.

Cassie:
Thank you for that explanation. It’s really pretty complicated, so here is a question that I think is on the minds of all of our clients. So now we know what we’re expecting. Doesn’t mean it can’t change and frequently, but so you and your investment team, what kind of changes are you going to be making or what are you thinking about in terms of our portfolios based on the information that we now have?

Hillary:
Yeah, so the answer is complicated. Cassie, maybe I’ll take it in two parts here. First, let me address how tariffs can impact individual companies and how we’re thinking about which companies to invest in. And then we can talk about broader asset classes as a whole. So if you take a beverage company like Coca-Cola, a few weeks ago, president Trump announced a 25% tariff on steel and aluminum imports. A company like Coca-Cola uses a lot of aluminum, they bottle a lot of soda in aluminum cans. A can like this costs about 4 cents to produce. So a 25% tariff increase will cause that price of the aluminum can to increase to 5 cents. So if you’re talking about going to a store and buying a six pack of soda, you can expect to pay 6 cents more. All else being equal. That’s pretty manageable for a company like Coca-Cola and it’s pretty manageable to consumers as well.

Most consumers aren’t, aren’t going to notice a 6 cent increase in the price of a six pack of soda. And Coca-Cola as a large multinational corporations has a lot of other options. They could choose to bottle more of their sodas in plastic, they could choose to bottle more of it in glass bottles. It’s quite easy for a company like that to change production lines in order to help them with that slight cost crunch they’re going to get from that tariff.

However, if you’re talking about a smaller company that only uses aluminum cans to package their products, switching to plastic or glass is a big decision that can take years to implement successfully, that type of company would be hurt more. If you take an aluminum tariff to a different industry such as an auto manufacturer, aluminum’s used widely in the auto industry. It’s used in transmissions, engine blocks, brakes, air conditioning components.

If you’re looking at electric vehicles, electric vehicles used substantially more aluminum than gas powered vehicles do because it’s a light metal that helps extend the battery range, which offsets some of the weights of EV batteries. Those companies are either going to have to take a substantial hit to their bottom line, which is part of that repricing we’re seeing in the market, or they’re going to try to pass on those costs to consumers, which will increase inflation, which will also decrease demand.

And so that’s why you’re seeing such a big repricing in the market over a short period of time where companies sourcing materials and who they sell the products to also matters. If you take a company like Apple, over 75% of their suppliers are located abroad, and now those suppliers are being tariffed when they try to get those goods to manufacture their products, over 50% of their revenues come from abroad and the US dollar is now falling on the tariff announcements, which is very bad for a company who earns a large portion of the revenue abroad. So a company like Apple had very negative performance this week on that news.

So overall, tariffs impact every company very differently. It really has to be analyzed on a company by company basis. Every company has different supply chains. They earn their revenues in different ways, even with the bad negative reaction yesterday, the stock market, many companies in our portfolios actually went up in value. So it’s just going to take some time to analyze the potential impacts on a company, by company, by basis.

And really I think the worst thing you can do is throw the baby out with the bath water and think that all companies are going to perform poorly in this type of environment because that’s simply not the case. More broadly speaking though, from an asset class perspective, there really are no magic bullets, but there are areas of the market that are working well.

Diversification is back this year. Bonds are performing well. We’ve had high yields to start with, which really helps protect from an equity market drawdown. We’re seeing that play out in real time here, which is positive for investors, especially on the more conservative end of the spectrum.

We are looking to make some changes in the portfolios. We’re looking to go higher in credit quality within our fixed income allocation, and we’re looking to cut some areas of our portfolios that are more exposed to tariffs. So we are making some changes in the portfolios, but again, it does take some time to analyze what the impact could be on the different companies and asset classes within our portfolios, given that the news is changing so rapidly, but we are on top of it and we will make changes as warranted.

I would just encourage clients to really look past the noise here. You should not make rash decisions at this time. Beacon Wealth is working on it actively, and we will do what we can to get us through this difficult time in the markets.

Cassie:
Well, thank you to you and the investment team, Hillary. I think it really gives people some peace of mind to know that your eye is on this, that you are making changes based on the information, and also really appreciate your time to talk through a very complex topic today.

As I said before, if you have follow-up questions, please don’t hesitate to let us know, and we’re happy to address those now and in the future and just really appreciate all of our clients and we’ll do everything we can to answer your questions during this period of volatility in the market.