Tariff Tariff Tariff! (part 2)

Happy Sunday

If you’ve read my newsletter for a while, you know I try to understand the economic mechanics of what’s happening.

When tariffs hit, prices go up, people buy less stuff, domestic companies produce more, and imports drop. The government collects some tax money, domestic producers get a boost, but consumers generally pay more.

Almost all economists agree it creates inflation in the short term. The long-term effects depend on how supply chains adjust. This administrations tariff blitz has put the markets in a rut, and I thought it would be helpful to break down what's actually happenin.

Lets dig in…

Current Warning Lights

I pay close attention to these indicators, and they're all flashing red:

• Consumer sentiment just hit its lowest level since November 2022

• Morgan Stanley cut its 2025 growth forecast from 2.3% to 1.9%

• Goldman raised its inflation projection by 0.4 points

Christine Lagarde (ECB chief) is warning that a trade war would hurt "everyone" but "particularly the United States." When central bankers start sounding alarmed, I take notice. The thing is though if this isn’t considered a trade war - what the hell is?

Their is some winners coming out of this though…

Holding up better:

• U.S. Steel and Nucor (up 12%ish and 8%ish respectively since March 1)

• Companies with mostly domestic operations

• Consumer staples that can pass on higher prices

Not everything is dropping equally. Here’s what I’m seeing:

Getting crushed:

• Car companies with Mexican supply chains

• Tech firms with Chinese manufacturing

• Anything alcohol-related (the EU’s 50% whiskey tariff + potential 200% wine tariff is brutal)

The spirits industry is particularly worried. The Wine and Spirits Wholesalers group says imports account for 35% of U.S. alcohol sales. Wine was already down 8% last year.

Tariffs Everywhere

Here’s the rundown of what’s already in place:

• 25% tariffs on all steel and aluminum imports (started March 12)

• 25% on basically everything from Canada and Mexico (with some temporary exceptions)

• Around 30% on Chinese imports (the old 10% tariffs plus new 20% ones)

• And now there’s talk of 200% (yes, two hundred percent!) on European wines and spirits

Things are moving quickly. Most of us thought Trump would threaten big tariffs but implement something more modest - that’s what happened in his first term. Not this time, these tariffs are real and affecting future revenue potential of thousands of publicly traded companies.

So where does that lead us?

The Market’s have been having a bit of a Panic Attack

You've seen your portfolio. The S&P 500 dropped into correction territory last week - down over 10% from its February peak. Bloomberg says it's the fifth-fastest drop in 75 years. Ouch.

We all heard the post-election talk about the "American exceptionalism" trade - however, European stocks are now outperforming U.S. markets by almost 7% since mid-February.

I've been getting emails from readers asking if this is the start of something worse. Honestly, I don't know. Nobody has a crystal ball. But one thing's clear: this market action sucks for everyone. The uncertainty around trade policy is quickly becoming untenable for our nation.

Let’s get one thing straight though - Lets zoom out a bit.

The U.S. economy is a monster and we are in fact “exceptional” when we compare ourselves to our peers.

What Trump’s Team Is Saying

Despite the market chaos, Trump and team are sticking to their guns. Trump said “you can’t really watch the stock market” and he won’t “bend at all” on trade. These commons leads the market to really its only path right now, uncertainty.

Treasury Secretary Bessent said “if we have good policies then the markets will go up” - which seems pretty disconnected from what’s happening.

Commerce Secretary Lutnick keeps talking about short-term pain for long-term gain.

It all reminds me of that old joke about economists: “Sure, it works in practice, but does it work in theory?”

Dates to Watch

I've got these circled on my calendar:

• April 1: EU puts that 50% tariff on American whiskey

• April 2: Decision on extending exemptions for certain Canada/Mexico goods

• April 2: Possible "reciprocal tariffs" kick in

Markets are hanging on these decisions. If we see any softening of stance - like extended exemptions or delayed implementation - expect a relief rally. But if Trump doubles down with no compromise, we could break through the recent lows. Most analysts think we're in for more pain before any potential trade deal emerges.

My Take

I’ve been doing this long enough to know that predicting Trump’s next move is a fool’s errand. That said, markets have clearly underestimated the resolve on tariffs this time around.

Bernard Baumohl at the Economic Outlook Group wrote that “the red flags of recession are furiously waving,” which seems a bit dramatic but not entirely wrong.

Personally, I’m watching to see if markets can find some stability next week. If we get another 5% down, I‘m considering it a buying opportunity in some defensive names. But I’m definitely not backing up the truck yet.