Tariffs and the Importance of Proactive Portfolio Management.
After a month-long pause, President Trump moved forward with increased tariffs and announced a series of measures that are likely to result in higher tariffs for a variety of products from a range of countries. These include:
- 25% tariffs on imports from Canadian and Mexican goods
- Additional 10% tariff on Chinese imports (moving the total to 20%)
- 25% tariff on imports of all steel and aluminum beginning on March 12th
Reciprocal 25% tariffs were announced by Canada, and China imposed a 10-15% tariff on U.S. agricultural imports. Mexico promised to respond with tariff and non-tariff measures.
Those tariffs could result in higher prices on everything from tech to t-shirts, potentially increasing average price levels by an average of 1.0-1.2%.1 The total effect of these tariffs is anticipated to be the equivalent of a 7-percentage point hike in the U.S. effective tariff rate, the highest rate since 1943.1
Various negotiations are taking place, particularly in regard to the auto-industry, and the situation remains fluid. It is possible future negotiations can reach a compromise. However, even if all or some portions of these tariff increases are cancelled or postponed through negotiations, many assume that the trend towards higher tariffs will continue under the Trump administration.
For investors, then, it is time to consider what the potential impact will be on the economy and the markets -- and how they should therefore prepare their portfolios.
The Impact of Tariffs
Tariffs are a tax on products or services entering a country, the cost of which may be passed on to consumers of those products or services. Tariffs on materials like steel and aluminum filter through an economy and raise the cost of a range of industries from automobiles to manufacturing. One estimate of the impact of the 25% tariff on imports from Mexico and Canada is that it will add $3000 to the cost of roughly 16 million vehicles sold in the U.S., while gas prices could rise 50 cents a gallon in some areas of the country.2 Of course, retaliatory tariffs against U.S. exports may further impact growth.
Although higher tariffs may redirect revenue to domestic companies and industries and increase government revenue, some economists are concerned that they could lead to less efficient markets, slower growth, and potentially higher inflation.
According to the Tax Foundation, the $80 billion in tariff revenue imposed from 2018-2019 during the first Trump administration, which were largely extended by the Biden administration, will potentially reduce long-term GDP growth by 0.2% and ultimately result in the loss of 142,000 jobs.3
As shown in the chart below, in 2017 leading up to the tariff implementation, and during the 2018-2019 time frame, the market saw an increase in volatility and a choppy market. The S&P 500 fell –4.38% in 2018 and the VIX spiked above 30 on multiple occasions. However, despite volatility increasing, the market recovered and showed strength and resilience finishing 2019 up an impressive 31.49%.
To be sure, estimates of the impact of tariffs depend on a number of variables that are difficult to predict; for example, the scope and level of any retaliatory tariffs on U.S. exports or how long the tariffs will last. Many assume the Trump administration is using the threat of tariffs as a negotiating tactic to gain concessions on a range of matters. If so, the impact could be relatively short lived.
Preparing you Portfolio
There’s an old saying that the only certainty in the markets is uncertainty. Nonetheless, although no one can be sure about the scope, breadth, and impact of new tariffs, investors should start considering whether they should adjust their portfolios.
Expect Bumps Along the Way
The U.S. economy has remained resilient, but investors should also be on the lookout for spikes in volatility that could arise from unexpected economic data or geopolitical tensions. President Trump has often used tariffs as a negotiating tactic which could also add volatility to companies with significant non-U.S. revenue exposure.
We believe there are three steps to consider in the face of higher tariffs.
Diversify, diversify, diversify. Several broad-based equity benchmarks have increased concentration today due to strong performance over the past several years of a group of influential companies often referred to as the Magnificent 7. In the face of uncertainty, the oldest advice is still the best: Make sure your portfolio is diversified. Specifically, investors should consider strengthening their diversification by:
Focusing on income. Investors may want to strengthen income streams with a focus on high quality dividend stocks. Moreover, strategies that incorporate covered calls4 to maintain or enhance income streams could be a potential way to take advantage of higher volatility. Call premiums typically increase with volatility, increasing the premiums received in a covered call strategy and helping smooth out the divots.
And bond yields remain higher than in recent years and should be able to provide consistent income streams above the rate of inflation. Bonds could also be viewed as an attractive alternative to risking capital in the equity markets and a “flight to quality” could see treasury bond prices rally.
Seeking potential safe havens. Investors may consider an allocation to precious metals and silver, which historically have served as a “safe haven” in times of volatility. At the same time, natural resource-oriented companies like those in the energy and materials sector could also perform well if energy and industrial production begins shifting to the U.S.
Stay the course with broader themes. To begin, we stand by what we said in our articles on our six 2025 Outlook Investment Themes, the Longer-Term Trump Trade and Amplify ETFs CEO Christian Magoon’s discussion of Portfolio Positioning for Trump 2.0. We still believe the current environment, reinforced by steps the Trump administration has taken, supports artificial intelligence, cybersecurity, and crypto and blockchain stocks. We also believe these industries are less likely to be directly impacted by tariffs given they are generally less dependent on exports.
Look at small and mid-cap stocks. As we discussed in our article describing the Longer-Term Trump Trade, small and medium sized companies are typically less dependent on exports for their revenues and may be more insulated from retaliatory tariffs. Of course, the important caveat is that the companies should not be dependent on international supply chains, especially, in this case, steel or aluminum. This distinction speaks to the importance of using an active manager who can identify high quality companies at all stages of their life cycle. Meanwhile, we believe a more favorable regulatory regime and increased merger and acquisition activity should also support smaller and medium sized firms.
The Bottom Line
We see the wisdom in the adage, “Hope for the best, prepare for the worst”. In the current environment, it may have even greater resonance. With the very real potential for higher tariffs and the resulting economic disruptions, it may be a suitable time to take steps to strengthen one’s portfolio.
Related ETFs
Income Focus:
- HCOW: Amplify COWS Covered Call ETF
- TLTP: Amplify Bloomberg U.S. Treasury Target High Income ETF
- DIVO: Amplify CWP Enhanced Dividend Income ETF
- IDVO: Amplify CWP International Enhanced Dividend Income ETF
- QDVO: Amplify CWP Growth and Income ETF
- SOFR: Amplify Samsung SOFR ETF
- COWS: Amplify Cash Flow Dividend Leaders ETF
Scarce Resource Focus:
Themes Focus:
- AIVC: Amplify Bloomberg AI Value Chain ETF
- BLOK: Amplify Transformational Data Sharing ETF
- HACK: Amplify Cybersecurity ETF
Small-Mid Cap Focus:
1The Fiscal, Economic, and Distributional Effects of 20% Tariffs on China and 25% Tariffs on Canada and Mexico | The Budget Lab at Yale
2Trump's Tariffs and What's at Stake, in Nine Charts
3Trump Tariffs: The Economic Impact of the Trump Trade War
4A covered call refers to a financial transaction in which the investor selling call options owns an equivalent amount of the underlying security.
The S&P500 index (SPX) is a market-capitalization weighted index of the 500 largest U.S. publicly traded companies.
The CBOE Volatility Index (VIX), or Volatility Index, measures the market's expectation of 30-day forward-looking volatility derived from the prices of S&P 500 index options.