Blog #12: The difference between Tariffs and a Stock Market Crash

This is my first ever real-time blog. I’m writing this on the morning of Monday, April 7th, 2025 as the stock market takes a dive; a dive that started last month from rumors and threats that the US was implementing tariffs on China, Canada, and Mexico. The dive continued last week when tariffs on dozens of additional countries were announced. In total so far, the S&P 500 has declined ~15% since February 19th. And YES: the US tariffs are to blame for the stock market crash. I just wanted to set the record straight that they are not the same, so let’s dive in…

Short term Stock Market Crash affects The market being down 15% affects different people differently. Most immediately, retirees or people relying on the market for income are most impacted. A retiree living off the 4% rule now must adjust how much they can take out each month to fund their life and with uncertainty in the market, may need to adjust their investment allocation to be more conservative. A younger worker with a longer runway to retirement is much less likely to need to change allocation (that’s me; 36 years old and retirement 25+ years away). A crash also affects individuals who have money in the market that they’ll need in the next 5 years. While I would argue they shouldn’t have had that money in the market in the first place, a new strategy is now needed. But if you’re like me, young, far from retirement, and not needing my invested money, the crash largely does not impact me. If I don’t sell anything, stay in the market longterm, and continue my same investment strategy then this crash means little to me. Stock markets impact different people differently and it's important to acknowledge that.

Long term Stock Market Crash affects In the long run, the stock market always goes up. That’s why smart advisors say “Time in the market > timing the market”. The longer you stay consistent and don’t panic sell, eventually every down market will reverse and the stock market will go back up. The problem currently is that we don’t know when the market will go back up, no one does. Trump could cancel his tariffs tomorrow and the market could immediately rebound and anyone who sold would miss out. Or Trump could dig in and continue his tariffs for the next… year… two years… who knows? The longer the tariffs go, the worse the market could get and maybe that triggers a recession. In that case, every single person in America would be impacted greatly. Think job losses amid company cut backs. In that case, cash and emergency funds should be greatly increased to account for job loss risk. This possibility is so uncertain that I don’t want to spend any more time talking about it, but it’s possible.

Tariff affects Tariffs will also impact different people differently, but one thing is true: tariffs will immediately impact every single person in America. For example, people who need to buy a new car in the next year or two. Tariffs of 25% will increase new car prices significantly. But you know what else will be impacted? Used car prices. Why? Because they follow new car prices up and down. And what’s more, car PARTS prices will go up. So even if you’re not buying a new or used car, you’ll see higher prices for car repairs. And what’s even more, car insurance rates are tied to repairs. So even if you don’t need a repair in the next year, your car insurance is likely to go up. Oh and all those groceries and amazon deliveries that rely on shipping? The cost of trucks, repairs, and insurance will force prices on basically all goods and food to go up. It’s all connected to transportation. If you’re someone, like me, who isn’t all that affected by a stock market crash, you ARE affected by tariffs. It’s impossible not to be. It’s just a matter of how much. Oh and those Amazon deliveries?...

Tom, explain to me Tariffs and Profit Margins

Trump has enacted a couple of tariffs that total 54% for certain goods that come into the country from China (think clothes, shoes, electronics, toys, etc.) For this example, I’m going to take an electronic that costs $100 to make in China. A company might sell it for $200 in America to maintain a 50% profit margin. If Trump’s 54% tariff on China stays in place, that $100 electronic will be taxed $54, resulting in it now costing the company $154 to make and sell in America. To maintain their 50% profit margin, the company would have to increase the price to $308, up from its previous price of $200. If all other competitors are also facing the 54% China tariff, then they’ll all be facing the same issue of how much they increase prices or whether or not they’d accept a lower profit margin. The only other option is for the company to move facilities to another country with less tariffs. The problem with that is that moving facilities is a really expensive and capital intensive process. So in the short term they’ll simply raise their prices to $308 and pass the tariffs onto consumers.

One more example: there are car parts that start out in America, get shipped to Mexico to be part of an engine, then the engine is shipped back to America for final assembly. Since Mexico has countered our tariff with a tariff of their own then you’d potentially have a part tariffed (taxed) TWICE. Once as it goes into Mexico and then again as it comes back into America. Bonkers. In that scenario, maybe the job would get moved back into America from Mexico. Only time will tell.

What can I do now to prepare?

Make sure your cash flow is positive because costs will go up if these tariffs stay. It’s time to start budgeting things like food, shopping, and gifts. If you’re currently spending $500/month on groceries, make sure you stick to that number amid increased prices from tariffs. That’s right, I’m basically saying you need to decrease consumption if prices go up to keep your spending stable. For bigger purchases such as a car or a new cell phone, you should probably seek alternatives like living with the car you already have and hope that tariffs are lifted in the near future.

Summary Checklist:

• Tariffs are not the same as a Stock Market Crash

• Different people will be impacted differently

• Young people can largely avoid short term impacts of a Crash

• No one can avoid the long term impacts of a Crash

• No one can avoid the impact of Tariffs

• The challenge for Americans will be to decrease consumption to balance out higher prices to fight further inflation of prices

If you enjoyed this topic, please like or subscribe to my email lists and social media accounts. You can help me by sharing it with friends and family. And as always, you can book a free call with me on my website, www.bmorefinanciallyfit.com