Tariff Turbulence: A Look at Potential Outcomes

By Scott Welch, CIMA®, Chief Investment Officer & Partner

We would not say the market is “panic-stricken” but it certainly is unsettled. Since President Trump’s tariff announcements on April 2nd, the market has been in a tailspin, volatility has spiked through the roof, and the “woe-mongers” are out in force.

The only advantage of being in the market as long as we have is that “we’ve seen this movie before”. We’ve lived through – and our investment portfolios have survived – the 1982 macro-recession (along with the OPEC oil embargo, “odd-even” gas lines, and the runaway inflation that preceded it), the 1987 market crash, the 2001 “dot-com” crash, the 2008-2009 “Great Financial Crisis” (GFC), wars in the Middle East, 9/11, COVID, the current Trump tariff kerfuffle, and everything in between.

And guess what – we’re still standing.

Let’s take a look at the “point-to-point” S&P 500 index performance since we entered the workforce back in mid-1985. We like to refer to this as our “Rip Van Winkle” chart – an illustration of how our portfolios would have performed if we had invested back in 1985 and then fell asleep for almost 40 years.

Source: Ycharts, data from July 7,1985 – April 7, 2025. You cannot invest in an index and past performance is no guarantee of future results.

If we had stayed invested since mid-July 1985, our portfolio would be up almost 3,000% — with some bumps along the way. Note that the dot-com crash and the GFC – periods when many investors thought the world was ending – barely register on this longer-term chart.

With that framing as a backdrop, what are some possible scenarios for the current tariff-induced market panic?

Scenario One: Trump is simply negotiating, and will back away from many, if not most, of his announced tariffs. Probability: 10%.

We don’t assign a relatively low probability to this outcome because we don’t like it – we actually think this would be a very positive outcome. We are on the record loudly and often saying we do not believe tariffs are good economic policy.

But we are not the President, and Trump – at least publicly – seems fully committed to his policies. For him to simply back away and go back to the existing global tariff regime seems highly unlikely to us, for a variety of reasons.

If he were to do so, it might be better off in the short-term for global trade, but the US would lose a great deal of authority, prestige, and believability, and it would be difficult to negotiate other deals going forward.

Scenario Two: Trump largely sticks to his announced policies but negotiates country-by-country deals with our trading partners – perhaps raising tariffs and prices but coming to terms with global trading partners. Probability: 75%.

We believe this to be the most likely outcome. No one – not even the Trump Administration – wants a full-blown global trade war. That is a lose-lose situation for everyone.

We believe we will need to endure 3-4 months of heightened market volatility and, potentially, recessionary forces on our economy and on our investment markets, but that we eventually will reach mutual agreements with most of our trading partners. “Homeostasis” will return once the market has clarity on the new “playing field” of global trade.

Remember that what the market hates the most is uncertainty. Clarity on trade policy – even if not everyone is happy with all the details – is better than uncertainty. The market will adapt to whatever proves to be the current “rules of engagement” – as long as it knows what those rules are.

This is not a Pollyannish view – we understand and accept that we may be in for a few rough months of turbulence. But we also believe that democratic governments ultimately need to be responsive to their constituents, and so we will reach some level of agreement and move forward.

As illustrated in the above chart, once “the market” and investors have greater clarity as to the new rules of the game, they will adapt, and we will move on – this is our expected outcome.

But we may not enjoy our usual “summer doldrums” with respect to market volatility and political rhetoric.

Scenario Three: The Trump Administration is not “negotiating” and is willing to undergo a full-fledged global trade war. Probability: 15%.

It is the rare politician, and certainly not Donald Trump, who “hedges their bets” when they make a policy announcement. They do not come out weak and already negotiating against themselves – they come out strong and seemingly immovable.

Only then to negotiate “offline” to a mutually acceptable outcome.

We believe this is where the Trump Administration currently stands – but Trump himself is (publicly) “all in” on his current policies – and he may mean it. There is at least some probability (we assign it 15%, but who knows?) that he means exactly what he says –that we have been mistreated by our global trading partners for decades and he aims to stop that – now.

In many respects, it is similar to pulling a band-aid off slowly or quickly. Trump is choosing quickly, and he at least publicly states he is willing to undergo what economic and market pain that may cause in order to reach what he deems to be an equitable trade regime.

We think this scenario has a fairly low probability. Trump DOES pay attention to voter polls and the stock market, and if they continue to move against him as they have, he will react.

But, for now, he seems to mean business, and history has proven it is very unwise to underestimate Donald Trump – he more often than not gets what he wants and is willing to withstand the “slings and arrows” that go along with that.

We think this would be a bad outcome for the US and for the global economy. And, therefore, for the global capital markets. But we don’t discount it happening.

So, if we assume our clients have constructed existing portfolios that meet their long-term investment objectives, our advice is to stay invested, stay patient, and stay disciplined.

For investors looking to deploy new capital, we recommend caution. We almost never recommend not being invested and sitting on the sidelines, and we don’t recommend it now.

But we do believe it would be appropriate to not take excessive risks or big bets, unless you have “aspirational” money you can afford to lose without affecting your current lifestyle and longer-term goals.

As the ancient saying goes, “This too shall pass.”

We hope you find this helpful. As always, if you have any questions or would find it helpful to discuss further, we’re here for you. Please don’t hesitate to reach out.