Introduction

In today’s globalized world, economic terms like tariffs and market overreactions often make headlines. Q1 for 2025 was filled with a new president and the constant threat of tariffs. We saw days where a tariff would be discussed followed by the immediate dismissal or postponement of said figure. The market doesn’t like uncertainty, and this was apparent that even on days where good news was shared. Two days after the quarter ended, we as a country celebrated “Liberation Day”. Boy was it something, the announcement came at the close of the stock market and with a single flip of the presentation board, the market flipped with a flood of sell orders that hit like a brick wall. The market had been heading down in the months leading up to this event, but a rare green day leading to the announcement was a blip of hope that the market had already priced in the tariffs about to be put in place. I do think that the gradual selloff from inauguration day, January 20th, was to price in a flat tariff of maybe 10%. But when we all saw that the minimum was higher than expected with some countries paying 40, 50, and even more percent, it was going to be rough even for a short period of time. No one, and I mean not even Warren Buffett can predict the market to move. You can remember back to our first meeting and that I have always tried to reinforce this notion by saying “I can’t guarantee anything”, but you know I am an optimist with the market and believe that over time it will be “up and to the right”. This isn’t me trying to predict the market, but I can always hope and the hope I have right now is that it will be like March of 2020 when the market crashed in the matter of just a few days and then spent the summer regaining that loss plus much much more. Of course, I as your adviser should point out that it could be a while before we see a bottom or any kind of return to all-time highs. As always, I can’t guarantee anything. Now let’s look at some breakdown of tariffs and overreactions.

What Are Tariffs?

Tariffs are essentially taxes imposed by a government on goods and services imported from other countries. The primary purpose of tariffs is to make imported goods more expensive and thus less attractive to consumers compared to locally produced goods. Here’s a simpler way to think about it:

· Imagine you run a lemonade stand. You sell your lemonade for $1 per cup.

· Your neighbor also runs a lemonade stand. They sell their lemonade for $0.90 per cup.

· To help your business, the local council imposes a tax of $0.20 on every cup of lemonade sold by your neighbor. Now, their lemonade costs $1.10 per cup.

· As a result, customers are more likely to buy lemonade from you since it’s cheaper.

This is how tariffs work on a larger scale. Governments impose tariffs to protect domestic industries from foreign competition, encourage local production, and sometimes to retaliate against other countries for imposing their own tariffs.

Types of Tariffs

There are two main types of tariffs:

· Ad Valorem Tariffs: These are calculated as a percentage of the value of the imported goods. For example, a 10% ad valorem tariff on a $100 item means the tariff would be $10.

· Specific Tariffs: These are a fixed fee based on the type of item. For example, a $5 tariff on every pair of shoes imported, regardless of their price.

Effects of Tariffs

Tariffs can have various effects on the economy, both positive and negative:

Positive Effects

· Protection of Domestic Industries: By making imported goods more expensive, tariffs encourage consumers to buy local products, which can help domestic businesses grow.

· Job Creation: As domestic industries expand, they may hire more workers, potentially reducing unemployment.

· Revenue for Government: Tariffs generate income for the government, which can be used to fund public services. This is where President Trump gets the idea of a potential replacement for income tax etc.

Negative Effects

· Increased Prices for Consumers: Since tariffs make imported goods more expensive, consumers may have to pay more for certain products.

· Retaliation: Other countries may impose their own tariffs in response, leading to a trade war that can harm international trade relations. We have already saw this from the big boy, China. They have already announced at least a 24% tariff on all US goods.

· Inefficiency: Tariffs can protect inefficient domestic industries that may not be able to compete on their own in the global market.

Market Overreaction

Now, let’s shift gears and talk about market overreactions. In the financial world, market overreaction refers to investors’ exaggerated response to new information, whether it’s good or bad. Here’s a simple analogy:

· Imagine you hear a rumor that a popular restaurant in town might be closing down.

· Even though it’s just a rumor, people start to believe it and stop going to the restaurant.

· As a result, the restaurant quickly loses business, which ironically makes the rumor come true.

This is similar to how market overreactions work. Investors might overreact to news about a company, causing its stock price to plummet or soar based on speculation rather than facts.

There is a list of tariff exemptions including semiconductor imports.

Causes of Market Overreaction

Several factors can cause market overreactions:

· Emotional Responses: Investors’ emotions can drive irrational decision-making. Fear, greed, and panic can lead to hasty buying or selling of stocks.

· Herd Behavior: Investors often follow the crowd. If many people start selling a stock, others may follow suit, amplifying the effect.

· Short-Term Focus: Investors may focus too much on short-term news and ignore the long-term potential of a company.

Consequences of Market Overreaction

Market overreactions can have significant implications for the economy and individual investors:

· Volatility: Overreactions can cause extreme fluctuations in stock prices, making the market more volatile and unpredictable.

· Opportunities for Savvy Investors: While overreactions can lead to losses, they also create opportunities for astute investors to buy undervalued stocks or sell overvalued ones.

· Impact on Companies: Unjustified drops in stock prices can harm a company’s reputation and ability to raise capital.

Conclusion

While yes, the market dropping isn’t fun, it is ultimately the nature of the beast. I have stated many times that I am a long-term bull and while I use short-term trading products, I lean toward the growth side of investing. We are heavy on the call side of option contracts for a reason and that is that I believe the market will rise with time. We will always have corrections and bear markets along the way, but taking a ten-thousand-foot view of the market shows that no matter the length of a downturn it has proved time and time again to gain investors capital if they can withstand the downturns and not exit the rollercoaster prematurely. I will always try to position my clients for long-term growth to the best of my ability, but that doesn’t always mean that our investments only go up. Q1 wasn’t pretty, but it could be a great opportunity for us in time.

Tariffs and Market Overreactions