Investment Climate Mar 2025: Tariffs, Tariffs, Everywhere!

 

The fear of tariffs set markets in a tizzy in the latter half of the first quarter of 2025, particularly hitting hard our growth companies as fear of higher inflation and interest rates once again drove a frenzy of underperformance for the fastest growing companies just as they had been gaining their footing through 2024.  As April progressed and the effects of “Liberation Day”--the day Trump’s tariff plan was announced--unfolded, markets accelerated to the downside and have been on a rollercoaster ride ever since. 

 

Interestingly, our income-oriented companies' stock prices held up relatively well and were essentially flat in the first quarter.  While we are glad to see our income names do well in this environment (as they are designed to do in uncertain times), we believe that the outperformance of growth-oriented company stocks by income stocks is unsustainable. We are likely to see a significant move in the market in the coming months that will boost the performance of growth companies. In fact, it is our view that this may be one of the best buying opportunities in growth companies we have seen in four decades! 

 

Why?

 

Our mentor, Dick Taylor, often would use the phrase “we get by in spite” when times were difficult due to actions taken in Washington. What he meant by this was that policymakers will make mistakes -- more often than not -- and in spite of this reality, well-managed companies in front of fertile growth fields will find their way through bad (or unfavorable) policy and ultimately do well.  For the bulk of the 21st century, we have been arguing that there are many things the government has been doing that has put roadblocks in front of businesses. We won’t rehash them, but it suffices to say that they primarily relate to the heavy hand of government in the form of regulation.  For example, the government’s COVID response was absolutely off the charts in its insanity; we need say no more on that!

 

Today, regardless of how one views Donald Trump, the whirlwind of the fist 100 days of the Trump Administration has brought forward the most aggressive, meaningful, and potentially impactful set of plans to rein in government overreach we have witnessed in our time in the business (now almost 40 years). It is the first time in such a tumultuous period that we can honestly say that we will not just get by in spite of government actions, but that we will actually come out much better off as a result of government policies. We are certain that if Dick Taylor and his mentor, Thomas Rowe Price, were alive today, they would say the same. And while we are not fans of protectionism, we take the view that this seemingly chaotic approach to global trade will ultimately result in a much freer world trade order that will greatly benefit the entire world, especially American business and workers.

 

Needless to say, if we are proven right, by that time there will be no time to react to take advantage of this opportunity because by that time markets will have violently reset growth companies’ valuations to the upside.  It’s been a rough few years for growth companies, but our message is to hang in there and, if you don’t have positions yet, buy!

Steve and Steve Have A Great Idea

What a day today in markets!

More on that later, but as a follow up to the blog article we published last week about the market missing the big picture about tariffs and the economy, we wanted to highlight some recent commentary by two very notable economists, Steve Moore and Steve Forbes, regarding tariffs and the tax system. Last December, Moore and Forbes published an op-ed in the Wall Street Journal that argued in favor of reducing the personal-income and corporate tax rates to a flat tax rate of 15%. In the article, they detailed how by eliminating wasteful business deductions and loopholes, the simplified low rate will supercharge the economy. They even claimed that this measure to keep more money in the pockets of Americans could ironically end up causing the “rich” to pay even more (not sure that is needed since the highest earners already pay the vast majority of taxes, but...).  

 

In Moore’s newsletter, the Unleash Prosperity Hotline, he recently doubled down (and more) on this proposal in the context of the recent tariff announcements by the Trump Administration. He argued that higher tariffs must be offset by pro-growth tax cuts if we are to restore investor confidence and return to growth in the stock market. Moore believes that this would in effect pay for the cost to taxpayers that the tariff represents as Trump goes about trying to reshape trade relationships around the globe. He suggested a "15% plan": 15% tariffs, 15% corporate tax, 15% personal income tax, 15% capital gains/dividends/death tax, etc. Our only counter is that maybe it should be 10%!

 

We have been arguing for a tax cuts and a simplification of the tax code to a flat tax for years, and we have our blog articles here, here, and here to prove it. As we argued last week, these Trump tariffs can be even more effective if they are bolstered by fiscal measures that allow Americans to keep more of their hard-earned money—and invest more of it into dynamic companies.  

 

The good news is that Trump already has made comments that indicate he is headed in a positive direction in terms of fiscal policy, such as when he proposed reducing the federal corporate tax rate to as low as 15%. We suspect President Trump will not read our blog, but hopefully he will listen to smart guys like Moore and Forbes in this tense moment in the markets and take these economy-boosting measures.

Given the announcement today that he was pausing the reciprocal tariffs on the entire world x-China, for 90 days, it appears that the trade issue is far from over but that the President clearly has a long-term plan in mind. It is likely wise for investors to let this play out as the wild recovery in the market today demonstrated how dangerous it is to be a trader.

Our nation’s government has a real opportunity here to make a very positive impact in favor of economic growth. Regardless of what happens, we will be here using our blog to add to the chorus of those calling for the right actions to unleash prosperity. 

 

https://nypost.com/2025/03/09/opinion/tax-cuts-then-tariffs-why-trump-must-put-us-economy-first/  

https://www.bizpacreview.com/2025/04/09/stephen-moore-big-beautiful-tax-cuts-should-offset-any-tariff-increases-1535032/

Seeing Beyond The Tariff Storm

In light of the extreme volatility and market reaction that the markets have displayed in response to the Trump Administration’s new tariff regime, we want to emphasize that the market appears to be shooting first and asking questions later. While the magnitude of the tariffs was higher than expected, which resulted in a very violent and negative reaction in markets, we emphasize that there is much more to this story than just simply tariffs—as we referenced in our blog post on March 11. We believe the market is yet again missing the forest for the trees.  

 

Historically, we have not been proponents of the use of tariffs to the extent that they represent protectionism that can harm free enterprise. However, we recognize that for decades, the United States’ trading partners have not been as favorable to free trade as we would have liked, and that even the United States has engaged in protective trade behavior in the era of globalization. Clearly, the Trump Administration is trying to use these tariffs in order to level the trading playing field. Trump views U.S. relationships with its trading partners holistically—considering everything from non-tariff trade barriers to defense relationships to U.S. aid—and he is hoping these partners will come to the table to negotiate better terms for the United States. We believe that if this strategy is successful, it could ultimately lead to a more effective trade system that benefits both the U.S. and global markets.  

 

Putting aside the tariff issue for a moment, Washington is also taking other actions that are clearly positive for the economy, yet the market does not seem to want to take these into account. These measures include significant progress on regulatory relief for businesses, reductions in government spending, and the pending legislation in Congress to make existing tax rates permanent and offer further tax relief. Lower regulation and taxes are the keys to unleashing free enterprise in the United States. 

 

The twin pillars of free trade and free enterprise are the necessary ingredients of a strong U.S. and world economy. Many of the more libertarian commentators who are shrieking about the Trump tariffs are failing to see how these measures could actually lead to a freer trade system on both sides of the equation. The market is understandably distracted by all this negative news and is thus ignoring the positive economic developments underway. 

 

Unfortunately, we are experiencing yet another period of market overreaction, where the bears are having their day. However, our message is that we are bullish on business in America. Now is the time to be centered and still amidst the storm and hold fast to what we know to be true: that owning well-managed companies through these mad market cycles is the best way to invest in our future. And to the extent possible, this is an excellent time to diligently add to portfolios, or begin if one has not done so already!