Tariffs and Corrections

1. Tariffs Are Often a Negotiation Tactic, Not a Permanent Fixture

Historically, tariff threats have been used as leverage to secure better trade deals rather than as long-term policies. For example, during Trump’s first term, tariff announcements often led to negotiations (e.g., the USMCA replacing NAFTA), with outcomes milder than initially feared. Recent delays on tariffs with Mexico and Canada suggest this pattern may repeat, reducing the risk of sustained economic disruption.

2. Short-Term Volatility Doesn’t Derail Long-Term Growth

Markets often overreact to tariff news, creating short-term sell-offs, but history shows resilience. The S&P 500 dropped 4.38% in 2018 amid the U.S.-China trade war but rebounded with a 31.49% gain in 2019 once uncertainty eased. Current dips could similarly present buying opportunities for those with a long-term horizon.

3. The U.S. Economy Remains Fundamentally Strong

Despite tariff concerns, underlying economic indicators—like GDP growth above trend (2.3% in Q4 2024) and a stable unemployment rate (4.1%)—suggest resilience. The Federal Reserve’s cautious stance on rate cuts further supports a “wait and see” approach, cushioning against immediate panic.

4. Not All Sectors Are Equally Vulnerable

Tariffs impact specific industries (e.g., manufacturing, autos) more than others (e.g., healthcare, utilities). Diversified portfolios can weather the storm, and some U.S.-focused sectors may even benefit from protectionist policies. Investors can adjust exposure rather than abandon equities entirely.

5. Market Corrections Are Normal and Healthy

A correction (10%+ drop) isn’t a crash—it’s a natural part of market cycles, especially after record highs (the S&P 500 hit new peaks over 50 times in 2024). Even with recent declines (8.6% from February 19, 2025), the index remains above historical valuation averages, suggesting no immediate cause for alarm.

6. Inflation Fears May Be Overblown

While tariffs can raise costs, their inflationary impact tends to be short-lived unless sustained. Past trade wars saw price spikes subside as supply chains adapted or tariffs were rolled back. Current disinflation trends (e.g., core PCE at 2.6%) provide a buffer against runaway inflation.

7. Focus on the Bigger Picture

Trump’s administration has historically prioritized stock market performance, suggesting a tolerance for only limited declines (e.g., 5% in 2018 before policy shifts). Combined with pro-growth policies like tax cuts and deregulation, the long-term outlook remains positive despite near-term noise.

8. Patience Outperforms Panic

Knee-jerk reactions to tariff headlines rarely pay off. Investors who stayed the course during the 2018-2019 trade tensions outperformed those who sold. With markets already pricing in uncertainty, the bar is low for reality to exceed expectations, potentially sparking a rebound.

Best,

Lawson Winchester Team

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