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

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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 most 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.

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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.

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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 strive to 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 is able to endure and navigate challenging markets and situations. Ultimately, we believe principles and processes beat predictions, precisely because of the unexpected and unthinkable.

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Thank you for allowing us to serve you and steward your investment capital with great care.

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Although the statements of fact and data in this report have been obtained from, and are based upon, sources that the firm believes to be reliable, we do not guarantee their accuracy, and any such information may be incomplete or condensed. All opinions included in this report constitutes the Firm’s judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.

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