Today as we find the global financial situation in a great deal of uncertainty, it is a natural reaction to want to do something. We caution against letting your emotions guide your actions. One of the many benefits of financial planning is that it creates goals and strategies to achieve those goals. Our financial planning strategies are based on long-term data that considers previous uncertain times like this one. While in the heat of the moment, the situation can be very unsettling, taking the long-term view and being cautious with your actions is key to the success of your goals.
Prior to April 2, the typical previous U.S. tariff level was around 3%. The tariffs proposed by President Trump would raise that to somewhere around 25% depending on the product and country. While the markets had begun to price in the likelihood of tariffs in mid-February, the level of the President’s proposed tariffs were significantly higher and broader than expected which explains the strong market reaction these past couple days.
The proposed tariffs may be intended as an initial position in broader trade negotiations. How our trading partners will react and the eventual outcome to any negotiations remain hard to predict at this point.
The situation puts pressure on the Federal Reserve (the Fed) to act to support the economy. Fed Chairman Powell spoke on Friday and said that if the tariffs were completely implemented, the economy would likely slow in response to higher prices and lower corporate profits. Whether the Fed would choose to lower its Federal Funds interest rate, he said, would likely depend on whether higher prices were a one-time increase or if they become an ongoing inflation problem.
The Fed chose to leave its Federal Funds interest rate unchanged at its March meeting as it considered the economy to be in a strong position. Hiring in March remained strong with employers adding 228,000 new jobs and the unemployment rate coming in at a low 4.2%. Inflation had dropped slightly in February to 2.8% as measured by the Consumer Price Index, but it remains stubbornly above the Fed’s 2% target.
2025 already had some hard acts to follow. Rebounding from a down year in 2022, the U.S. stock market returned over 26% in 2023 and 24% in 2024—well above the 10% average long-term annual market return. That strong rally pushed the value of the U.S. stock market to the point that it accounted for 65% of the entire global stock market. At the end of 2024, the 15 largest U.S. stocks alone were valued more than the European and Japanese stock markets combined.
Such a level of growth was unsustainable and set the table for a market correction at some point. Over the past 80 years, market corrections occur almost annually and some last for months. Eventually though, the markets find sound footing and a new rally begins.
That is why we recommend sticking with a stock allocation through thick and thin. The stock market is always looking out several months and will start to rally if it believes the economy is about to turn a corner. It’s virtually impossible to predict when this will happen. Another stock market behavior is the tendency for the biggest stock market up days to follow soon after the big down days. Therefore, one needs to stay invested for one’s portfolio to fully recapture what it had lost.
Although it is contrary to human emotions, volatility can be used to our advantage in the long run. We have strategies to take advantage of down markets that expand as the pullback deepens (see here). Examples include accelerating dollar-cost averaging strategies and increasing Roth IRA conversions. If you are currently investing a large deposit over several months (dollar-cost averaging), it can be advantageous to accelerate that schedule to invest when the market is down. Our Roth IRA conversion strategies look to expand the amounts converted at staggered thresholds as the market declines, as illustrated in the link above. If you are interested in these strategies or others on the linked chart, please contact your Boulay team.
As noted, the outcome of the current situation is impossible to predict. Nonetheless, if you have any questions or concerns about your investment portfolio or financial situation, reach out to your Boulay Financial Advisor. Our goal of helping you “get there” means we want to make sure you are confident about the path you are on.