History tells us over and over again that the unexpected and the unthinkable are the norm, not an
anomaly. That is the real lesson of history. -Peter L. Bernstein, Investor and Financial Historian
Global trade has been a simmering issue since early 2018, but a flare-up in the U.S. and China trade
negotiations this month led both countries to increase tariffs to 25% on $260 billion of combined goods.
This unexpected turn of events dominated news headlines and helped send global equity markets on their
bumpiest ride since December. The U.S. holds the upper hand in the negotiations, but a fair trade
agreement could benefit both countries and many market commentators expect the tariffs will be
temporary. In other words, the U.S. and China trade deal is mostly likely delayed, not dead. President
Trump recently pushed back tariffs on autos from the European Union and Japan for six months, which
may signal the amount of time he believes is needed to wrap up negotiations with China.
In the meantime, tariffs matter. Global equity markets have responded negatively to the news – the S&P
500 Index (U.S.) and MSCI EAFE Index (Developed International Markets) both traded down more than 4%
the first couple of weeks in May, and the MSCI Emerging Markets Index is down more than 8% this month
– which we assume is markets recognizing tariffs for what they truly are: repackaged taxes that lead to a
(yet-to-be-determined) combination of higher prices for consumers and lower profits for businesses, and
slower economic growth as a result. In a world already struggling with slow economic growth, that’s bad
news. In the coming months, we may all see the impact of these tariffs not only through higher prices at
grocery and department store check stands and online Amazon orders, but also through greater risk and
uncertainty in our investment portfolios, particularly if more tariffs are imposed or negotiations break
down even further.
The key takeaway in all of this is that Peter Bernstein is right – the unexpected and the unthinkable are the
norm, not an anomaly. Today’s U.S. and China trade war might be November’s U.S. and Japan trade war;
or Brexit could finally play out this summer; or tensions in Iran could escalate to more serious and
dangerous levels; and who can guess what North Korea’s next move might be? There is a lot going on in
the world that can keep us up at night, and we to strive monitor it all closely as stewards of your capital.
But we continue to remind ourselves the principles of investing haven’t changed: price matters, patience is
rewarded for long-term investors, diversification works over full market cycles, and partnering with world-
class investment managers is a key element in building a global portfolio that’s able to endure and
navigate challenging markets and situations. Ultimately, we believe principles and processes beat
predictions, precisely because of the unexpected and unthinkable.
Thank you for allowing us to serve you and steward your investment capital with great care.