How will tariffs affect investment portfolios?

President Trump imposed tariffs on products from China, Canada, and Mexico shortly after taking office in January, soon followed by tariffs on imported steel and aluminum from all countries. Although the tariffs on Canada and Mexico were quickly put on hold, the reprieve may be short-lived, and the policy landscape remains fluid.

Tariffs are commonly thought to be inflationary, but the impact may be more like a “tax” that creates a one-time increase in prices rather than a sustained rise in inflation. Characterizing the rise in prices as a one-time event, however, is cold comfort to consumers or businesses paying the higher prices. Tariff-induced price increases could reduce purchasing power, which would dampen discretionary spending and exert downward pressure on inflation in other sectors of the economy. The Fed will be vigilant in trying to prevent tariffs from triggering a self-reinforcing inflationary spiral as workers try to recapture the loss of purchasing power. A rise in inflation expectations or a continued environment of “sticky” inflation may not lead to Fed rate hikes but would limit the likelihood of rate cuts in 2025.

The cost of tariffs may not be fully passed on to U.S. consumers. Importers may decide to absorb a portion of the tariff burden by reducing their profit margins instead of passing the full effect on to consumers. Foreign exchange rates may also adjust as an offset for higher tariffs, with the dollar’s recent appreciation softening the blow.

The impact of tariffs on consumers is also influenced by the degree to which domestic goods can be substituted for foreign goods at similar prices. For example, during the first Trump administration, the lack of domestic washing machine supply caused a temporary price surge until U.S. companies created greater manufacturing capacity.

With the tariff picture uncertain, businesses face challenges in understanding potential costs and incentives. We are monitoring business sentiment as expressed in corporate earnings calls and investor meetings, with recent earning results reflecting positive economic momentum during the latter part of 2024. We will be watching for indications that confirm or undermine the consensus assumption that trade disruptions will be limited, with most of the targeted countries offering concessions to de-escalate tensions.

We have positioned portfolios to benefit from a continuation and broadening of the stock market rally, while including conservative bond holdings to diversify portfolios in the event of a weakening investment environment.

If you have questions or comments about your personal portfolio or any of the trends and strategies we’ve outlined here, please reach out to any member of your Nixon Peabody Trust Company team. We’re always happy to hear from you—and help.

Daniel Kern
Chief Investment Officer
+1 617.345.1044
dkern@nixonpeabody.com