Guide to Tariffs - How tariffs impact the economy, markets and investors

As a follow-up to the article we posted earlier today, we are sharing the following resource from our friends at The Capital Group: Guide to Tariffs - How tariffs impact the economy, markets and investors

Special Update: Tariffs and Market Volatility

When all the experts and forecasts agree - something else is going to happen.1

Yesterday, President Trump announced new tariffs on nearly all major U.S. trading partners. These tariffs are “reciprocal,” on top of previously announced duties. These tariffs have had an immediately negative impact on the stock market and have caused a number economists to increase their recession probability forecasts.

Navigating Market Volatility: Staying Focused on Long-Term Success

These trade changes are an ongoing process, and it will take time to see their full effects. While stocks are volatile in this uncertain period, bonds are holding up, showing the power of diversification.

Investors have faced many challenges over history, including the pandemic, inflation fears, wars, recessions, bubbles, political turmoil, and technological disruptions. In every case, markets went on to new highs, even if it took some time.

Key Facts

To help cut through the noise, here are some of the biggest developments and issues from the tariff announcement:

• The immediate stock market reaction is negative, with the S&P 500 declining ~6% from 4/2/25 through ~10 AM on 4/3/25. Partially offsetting this, bonds have gone up, and the falling US dollar has helped international exposures.
• The newly announced tariff measures have been set at a minimum 10% rate, and the average tariff rate across countries is 25%, with rates for some countries as high as 49%. The level and scope are greater than many investors and economists expected.
• This all comes at a time when consumer and investor sentiment is low. Concerns currently include higher inflation and a possible recession, although uncertainty remains around policy implementation timelines and economic effects.
• At a company level, some U.S. manufacturers might benefit from less foreign competition. Conversely, about 30% of large U.S. companies' sales come from overseas, so changes in trade rules could impact their business. Many companies are already adjusting their operations in response.
• Given limited visibility into trade policy outcomes, the Federal Reserve has maintained interest rates, viewing tariff effects as "transitory" one-time events. If needed, the Fed could step in to support markets.
• When it comes to asset allocation, diversification has helped investors so far in 2025. Various asset classes—including bonds, international stocks, and some alternative investments—have helped support balanced portfolios during this period of stock market volatility.
• Nobody really knows how the tariffs are going to affect long-term economic growth and market outcomes. News outlets sell headlines and economists make predictions; however, both have demonstrably poor track records. This phenomenon was humorously and ironically illustrated by a famous American economist who quipped, The stock market has called nine of the last five recessions2.

Key Takeaways and the Path Forward

If you can keep your head when all about you are losing theirs...if you can wait and not be tired by waiting...yours is the Earth and everything that's in it.3

These tariff announcements represent a major shift in trade policy. That said, successful investing isn't about reacting to headlines or trying to time market movements. Rather, it's about maintaining perspective and a flexible, well-diversified portfolio aligned with your long-term financial goals.

There are many reasons to believe markets and the economy can eventually move past the current set of concerns. It's important to recognize that this pattern falls within normal market behavior. Historically, markets have positive annual returns approximately two-thirds of the time and deliver negative annual returns only one-third of the time. Despite these occasional downturns, the stock market has demonstrated growth across decades and full market cycles.

“Keeping your head” and having the fortitude and discipline to stay invested—or, even to take advantage of more attractive valuations—is a key principle to long-term financial success.

As always, we're here to help you maintain perspective and make informed decisions about your financial future.

Gratefully,

Sean Gross, CFP®, AIF® | Co-Founder & CEO

Endnotes:

1 Bob Farrell, former Merrill Lynch Market Technician.

2 Paul Samuelson, Economist and the first American to win the Nobel Memorial Prize in Economic  
   Sciences.

3 Rudyard Kipling, from the poem, “If”.

Liberation Day Q1 Market Update

Market Environment Indicator (MEI)
MEI readings declined from last week, but the indicator remains Positive after improving from Neutral last week. The weight of the evidence suggests that the current decline is not expected to extend into a significant downtrend. If the MEI reverses to Negative, it would be a signal of more substantial problems ahead.

Liberation Day
The S&P 500 and Nasdaq have recently had some of their worst days since 2022. If you’re following the news headlines, you have likely seen that the explanation for recent market volatility and losses is due to the anticipation of President Trump’s “Liberation Day” tariffs announcement. By the time you read this, the tariffs will have been announced, and the U.S. market reaction will be seen in tomorrow’s (4/3) trading. Times like these can feel uneasy, so I wanted to write a brief note to share my perspective. I hope you find this helpful, but please always feel free to reach out with any questions.

Understanding Market Concerns
While tariffs have been front and center amid recent market volatility, other economic data is adding to market concerns. It’s important to note that slow growth is part of the business cycle and doesn’t necessarily mean the cycle is ending.

Here are some important perspectives:

• Recession Forecasts: In recent interviews, President Trump did not rule out the possibility of a recession. Some investors and economists have been worried about a recession for the past three years. Just a year ago, many believed an economic downturn would be imminent due to inflation. Despite these fears, the stock market has performed well over this period with the S&P 500 still up nearly 60% since the bottom in 2022, and 10% over the past year. It’s important to take these forecasts with a grain of salt.
• Economic Policy Changes: New tariff policies have created market turbulence, although historical evidence suggests their long-term economic impact may be less severe than initial market reactions indicate. For example, in 2018 the market fell as tariffs were implemented, but earnings growth was still strong, and GDP was almost 3% that year. Eventually, new trade deals were reached.
• Inflation Concerns: The Consumer Price Index rose above 3.0% for the first time since last summer but has fallen slightly since then. This affects both consumer sentiment and spending patterns. Inflation has been closely watched for several years as it is a key consideration for how the Federal Reserve directs interest rates. Elevated inflation will make it difficult for the central bank to cut interest rates if the economy begins to slow.
• Employment Changes: Recent federal government layoffs have caused some concern, with the latest employment data showing a decrease of 10,000 federal jobs, though this number is likely to rise in future reports. While federal workers account for less than 2% of the workforce, there is concern of ripple effects on the private sector and job growth overall. Overall job growth remains positive, with unemployment still near historic lows.
• Consumer Sentiment: Survey data shows increased pessimism about future financial conditions, with inflation expectations reaching levels not seen since 1995. While this could impact future spending, how consumers feel can change quickly as well.

Maintaining Perspective
The potential for some period of turbulence as trade policy takes shape can be challenging. However, the pro-growth policies that had excited markets last year are still on the table. For example, an extension of the Tax Cuts and Jobs Act (TCJA) is currently being considered by Congress and significant pro-growth regulatory changes are in progress.

Market declines are never pleasant, but they are a normal part of investing. History shows that staying invested through challenging periods has typically rewarded patient investors.

Looking Forward
While tariff and recession concerns have increased, it's crucial to remember that economic forecasts are often unreliable timing indicators for investment decisions. What’s more important is holding a flexible, well-constructed portfolio that can withstand all parts of the market cycle. Please be on the lookout for additional communications in the weeks ahead, including my next letter which will explain how our investment philosophy and strategy are specifically designed, and particularly well-suited, for uncertain market environments.

Ultimately, current market conditions may feel uncomfortable, however maintaining a long-term investment perspective is still the best approach to achieving your financial goals.

Gratefully,

Sean Gross, CFP®, AIF®
Co-Founder & CEO

Account/Technology Conversion THIS Friday, 3/29!

Spring: a lovely reminder of how beautiful change can truly be. – Anonymous

Welcome to spring and to the next, and most exciting, chapter in Telos Wealth’s seventeen-year history! After many months of hard work, preparation, and planning on the part of our team, our long-awaited account and technology conversion will begin THIS Friday, March 29.

We have made every effort to ensure this process goes as smoothly as possible. We still expect there will be some minor hiccups; however, nothing that cannot be quickly and easily rectified. Should you experience any problems, or have any concerns, please contact us promptly so that we can quickly resolve. 

Here’s what you need to do:

1. Look for multiple emails from us and/or on our behalf beginning Friday, March 29. If you prefer to complete your account conversion in person, we will contact you to arrange a time for you to come into our office at time that is convenient for you.
2. You will receive multiple emails: Follow instructions for each email to review, electronically complete, submit, and/or sign documents ASAP—the sooner you complete this step, the sooner the conversion of your account(s) will be completed. 
3. If you have any questions, we will be working late on Friday March 29 and until 4:30 PM on Saturday, March 30. For the fastest response, please call or text us at 509-664-8844. You may also contact us via email: info@teloswealth.com
4. Enjoy Easter Sunday with your family and friends!

Here’s what to expect next:

1. We’ll contact you to confirm that your conversion documents were submitted successfully and let you know if anything else is needed to complete the conversion of your account(s).
2. After your account(s) have been converted, we’ll contact you to schedule a meeting to review your account(s), new technology logins, etc., and answer any questions you may have.  

Our account and technology conversion is just the beginning of several new and/or greatly improved enhancements we will be launching throughout the remainder of this year. Stayed tuned and buckle up!

With profound gratitude for the trust you have placed in us,

Sean Gross, CFP®, AIF® | Co-Founder & CEO

Sean Gross, CFP®, AIF® is the Co-Founder and CEO of Telos Wealth Management, LLC, a Registered Investment Adviser located at 656 North Miller St., Wenatchee, WA. Sean can be reached at 509-664-8844 or at Info@TelosWealth.com.

The Impact of SVB’s Collapse on Disruptive Innovation

If there is one common theme to the vast range of the world’s financial crises, it is that excessive debt accumulation, whether by the government, banks, corporations, or consumers, often poses greater systemic risks than it seems during a boom.

— Carmen Reinhart, Professor of the International Financial System at Harvard Kennedy School

Disruptive Innovation

Disruptive Innovation, as an investment theme, describes the investment opportunity presented when the introduction of an innovative product or service transforms an industry, upsets existing structures, creates greater efficiency, and makes sophisticated products and services accessible, and often more affordable, to a broader market.

Amazon (AMZN) is widely recognized example of disruptive innovation. In its first incarnation, AMZN disrupted book selling, then online retailing, then video and music content delivery, then grocery delivery, etc. As it innovated and grew its services, it created greater buying efficiency, lower costs for consumers, and ultimately greater demand for everything it offers to sell us, much of which we didn’t even know we needed! The business of AMZN, and of every disruptive innovator, is very capital intensive. If not for the capital provided through bank lending, and investor’s willingness to buy the stock and bonds of these companies, there would be much less, if any, disruptive innovation, and much less, if any, growth of investment capital.

Silicon Valley Bank Collapse

Over the last year, rapidly increasing interest rates drastically reduced the value of all existing bonds, including US Treasuries (bond values generally decrease as interest rates increase). Most banks invest their excess capital in Treasuries. Silicon Valley Bank (SVB) was especially vulnerable because of its non-diversified customer base. Most of SVB’s customers were venture capital firms and startup companies, especially in the technology sector, which are extremely capital intensive and unprofitable. According to Bloomberg News, almost 50% of all US startup companies backed by venture capital banked with SVB, in addition to 44% of US venture-backed technology and healthcare companies that went public last year.[i] (think: Disruptive Innovators).

Rapidly increasing interest rates made it more difficult for SVB to find profitable lending opportunities in these sectors (this is one of the main reasons the tech-heavy NASDAQ dropped over 30% in 2022). With fewer profitable lending opportunities, SVB invested most of its deposits in longer-term Treasuries to achieve higher yields. While Treasuries are considered “risk-free” if held to maturity, their market value still declines when interest rates rise. As SVB’s depositors began to withdraw their money, SVB was forced to sell Treasuries to meet depositor demand, resulting in $1.8 billion loss on its Treasury bond portfolio. Unable to absorb further losses by selling Treasury bonds, SVB unsuccessfully attempted to raise capital through the issuance of additional shares of common stock and convertible preferred stock.

Interpreting SVB’s inability to raise capital as a reflection of its financial weakness, depositors withdrew $42 billion in a single day.^[ii] This resulted in shares of SVB Financial Group, SVB’s holding company, declining 67% through Friday of last week, before trading was halted and bank regulators seized control of the bank.

The End of Disruptive Innovation?

After a disastrous 2022 (largely due to the rapid increase in interest rates), our Disruptive Innovation strategy has been one of our best performing strategies in 2023, despite the stock market chaos created by SVB’s, and other bank failures. While we still very much believe in this investment theme long-term, we believe that caution is warranted due the failure of SVB, the likelihood of even higher rates this year, and the possibility there could be more failure among banks, especially those who specialize in financing the companies in this sector. For now, we are taking profits and redirecting the assets in our Disruptive Innovation strategy into our equally opportunistic, but much more diversified, Aggressive Unconstrained strategy.

Like the Disruptive Innovation strategy, the Aggressive Unconstrained strategy employs the Market Environment Indicator (MEI) to tactically increase and decrease risk. As I mentioned in my 3/15 letter, the MEI is currently negative. As a result, all our tactical strategies, including the Aggressive Unconstrained strategy, remain in a defensive posture with reduced market exposure and an overweight cash allocation.  

If you have any questions about bank failures and the possible impact on disruptive innovation companies, our Aggressive Unconstrained strategy, or any questions about your portfolio and the markets in general, please do not hesitate to contact me.

Thank you for giving us the privilege of serving your wealth management needs—it is a stewardship we approach with the greatest seriousness, care, diligence, and fidelity.  

Sean Gross, CFP®, AIF® | Co-Founder & CEO

Sean Gross, CFP®, AIF® is the Co-Founder and CEO of Telos Wealth Management, LLC, a Registered Investment Adviser located at 656 North Miller St., Wenatchee, WA. Sean can be reached at 509-664-8844 or at Info@TelosWealth.com.

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[i] https://www.bloomberg.com/news/articles/2023-03-13/svb-bank-failure-exposes-tech-s-venture-capitalists-to-huge-financial-risk

[ii] For comparison, Washington Mutual faced only $17 billon in withdrawals over two weeks in 2008.