Investment Note After Tariffs

Trump’s tariffs had a strong impact on the market. One might want to review or rethink investment strategies. In this note, I would explain my thoughts on these issues. 

1. If a market index draws down 10%, it is known as a correction. If it draws down 20 %, it is known as a bear market. So we have a correction. 

2. The market was overvalued. Partially it was due to the Biden Administration printing money. It is relatively easy to determine the effect of excess money on inflation, at least the 0th order, which I did in [1-3]. I tried to estimate its effect on the stock market but I gave up because it is way too hard to do so. 

3. Another thing to drive the US stock market was AI spending. This spending involves some speculation. It is hard to know how AI will contribute to productivity and by how much. Once the market turns south, this investment is cut. 

4. With tariffs’ plans out and the news of China’s retaliation in, the major risks have been discounted, which caused the market drop on April 3 and 4. However, there are still more risks. Because the world trading system is upended, there could be additional actions from other nations. China’s economy is in a bind (e.g. [5]), another problem that may impact the world market. Some hedge funds may be overleveraged. Drastic change of trading system may cause some hedge fund liquidation. 

5. The US government debt potentially is another problem. It was unsustainable because of Biden’s spending. If this debt explodes in 5-10 years, then investing in the US would be bad. The good thing is that the current administration is acting on it: DOGE and cutting expenses. During the Biden years, 85% of jobs added were government jobs. This is not sustainable and drags down productivity. Ideally, in peacetime government tax should be 15-20% [6]. The US is way above this. 

6. Despite these, long term (5-10 years) the US market is still the best to invest in. A comparison of GDP per capita was recently made between the US and the EU. Around the GFC (2008), the US and EU were about equal. Now the US is about double that of the EU. Even a left thinker acknowledged this [4]. (This broadly agrees with my theory, which is based on the Bible and philosophy. When I have time, I will write a paper about this.) If you invest for the long term, the US stock market is still your best option. 

7. My recommendation for the long term is still QQQ or SPY. QQQ is riskier than SPY but probably returns better. 

8. Because Trump’s tariffs change is revolutionary, I suspect the stock market recovery will not be a V shape (unlike during Covid). Company CEOs will be conservative because it is very hard to plan or forecast next quarter’s investment and earnings. The window of opportunities is between now and next quarter’s earnings, which is late July and August. 

When I have time, I plan to write one more on tariffs, on the theory side to explain [7]. 

References: 

1. US Government Debt and Deficit

2. Potential Financial Crisis? 

3. Inflation, Tariffs, and Bitcoin  

4. Fareed WaPo 6-14 Why Europe is falling way behind America’s powerhouse economy Fareed’s take: Europe is unable to keep pace with America | CNN  

5. WSJ 4-3 The Rest of the World Is Bracing for a Flood of Cheap Chinese Goods

6. Income Tax - How Much?

7. Trump’s Tariffs Changes World Trading System