Listen to a special audio message from President and CEO Peter Mallouk and Director of Financial Education Jonathan Clements as they discuss why the market is down, what a possible best-case or worst-case scenario would look like, and where they think markets are headed.
Transcript:
Jonathan Clements: This is Jonathan Clements, Director of Financial Education for Creative Planning. I’m talking to Peter Mallouk, President of the firm, and we are here at the close of business on Thursday, April 3, a day when the Dow Jones Industrial Average fell 4%, the S&P 500 fell 5%, and the NASDAQ composite fell 6%. Meanwhile, those who had exposure to foreign stocks did somewhat better because of the weakness in the U.S. dollar, and those who had some bonds might even be happy because bonds did very well on this particular day as the yield on the 10-year Treasury note dropped sharply. So, it’s been a mixed bag for investors, but rough on those who are heavy on U.S. stocks. What should investors make of all this, Peter?
Peter Mallouk: So much to talk about here, so let’s maybe start with the stock market up to yesterday. So up to yesterday, everyone was really stressed out, the market was down, the market’s down. But really, international stocks were up, emerging market stocks were up year-to-date, bonds were up year-to-date. And the S&P 500, if you exclude the Magnificent Seven, the seven large tech stocks that make up about a third of the index, the S&P 493 let’s call it, was actually positive year-to-date. Really, we had one bear market and it was in mega large cap tech U.S., the Magnificent Seven, these big tech companies, Apple, Google, Amazon, Facebook and so on. That’s where we were up until yesterday.
Politically, in the campaign, Trump and his team were talking about having tariffs. No one’s surprised that we’re here. In the last administration, they added a mini-tariff war as well. So everyone expected that. There’s been a lot of talk around it. So, why the sudden drop today, such a significant percentage drop and dollar drop particularly in the U.S. market? And the answer to that is the market’s surprised at severity of it. So the original expectations were, “Hey, we might get into this with China and a couple other countries, and we’re going to have a little tiff with those on our border, Canada and Mexico.” But what came out yesterday was literally every country on earth, including uninhabited islands, had tariffs imposed on them. And they were very significant, much larger than most people expected, and touching, obviously, more countries than people expected. And so the market had to adjust for the fact that, “Wow, we thought there was going to be a tariff war, but this is very, very significant, much more significant than expected.”
Jonathan: So, Peter, what do you think is driving the administration’s actions here?
Peter: Well, you know, it’s really interesting because let’s start with what the administration’s actually saying is driving it. So they’re saying, “Okay, number one, it’s a national security issue that we need to be doing these things at home. Number two, these jobs should be in the United States and we should bring all these things that are happening overseas back to the U.S. And number three, these deals that we currently have are unfair.” So let’s just take those one at a time.
One thing we did learn during COVID is that it actually is a national security issue to be dependent on critical things overseas. So, for example, we all know that it was hard to get a car, it was hard to get a washing machine. These are not things that we need for national security purposes, but it was a good example of how globalization works and the supply chain works. And I hate to get into globalization because it’s a big economic concept that sounds boring, but you have to understand globalization to understand tariffs. And globalization is just the idea that you allow money to go wherever you can get something done at the lowest price. So if Apple’s making a phone and it has 100 parts in it and they can get 30 of those parts made for less in China, then that’s where they’re going to make them. And China wins because people make more money than they would make doing other things. And the American consumer wins because they’re going to pay less for the iPhone than they would if it was all put together in California or in the United States. That’s the idea of globalization, is, you go all over the world, you get things done the most affordable way possible. Theoretically, and I agree, everybody wins with that.
Now, what happened is we had things like chips being made overseas. And if you can’t get chips to come here that are used in our national infrastructure, that’s a national security issue. But before all of this tariff arguments, both Trump and Biden had already, each under their administrations, agreed to bring those national security issues back to the United States. So hey, we’re not going to be dependent on Taiwan for our chips, because something could happen with China. We’re going to start to make these in Arizona. Are we going to pay more to make them in Arizona? Of course we are, or we wouldn’t have been importing them in the first place, but for national security reasons, this is where we need to do it. So does some stuff need to be in the U.S. for national security reasons? Yes. Was that happening anyway? Yes. Does this have anything to do with national security? Not really. We don’t need to make t-shirts and grow more avocados in the United States for national security purposes. So let’s set that topic aside.
The second is bringing the jobs back to the U.S. Now, what’s interesting is the United States is now tracking at one of the lowest unemployment levels in our entire history. Right now, we just don’t have enough people to take all of the jobs. So it’s not as if we have 8% or 9% or 10% unemployment. And also, you have to think about —most of the stuff, not everything, but most things that we’re bringing from overseas, are things that we are doing there, we’re getting what Nike and companies like that, these makeup companies, they’re getting these products overseas. They’re getting things done at a low cost of jobs that people here just don’t really want to do. So I’m not totally sold on that argument.
Of course, if every factory from all over the world that manufactured every phone part and car part and every piece of apparel had to be in the United States, then of course we would have very close to zero unemployment. We probably don’t have enough people to do all those things. We’d have to have a lot of immigration to make that happen or a baby boom where everyone could skip the first 18 years of their life to fill all of those jobs. But that would obviously drive up wages in the United States, and it would also drive up the cost of goods. So you’d have inflation. I’m not really buying that argument either, because unemployment is very, very low.
So that leaves us with a third argument that things aren’t very fair. 75% of what Mexico and Canada send overseas goes to the United States. Less than 3% of what we send goes to them. If the United States wants to get better negotiations on tariffs, and with 85% of countries we are on the losing end, another country will tax our goods going in more than we will tax their goods coming into the United States. If the goal is to do that, then that would be a positive outcome for the United States. We’d go back to a world where we sell stuff to other countries, other countries sell stuff to us, but they wouldn’t tax us more than we tax their stuff coming in.
I think that is ultimately the objective here. I think what he’s doing as part of a negotiation is to appear erratic and crazy. Now, half our listeners think he is erratic and crazy. Half of people think he might actually be wanting to have everything permanently here in the United States for forever, and what he’s saying about that is completely accurate. I think most likely he is trying to just negotiate deals with other countries, partially around taxing our goods going in there and partially around other things, whether it’s the border or stealing secrets or whatever it may be. And so I think that’s where it’s likely heading.
And when the stock market looked at that today, it basically said it agrees with that analysis. If the stock market believed that all of these companies, all of this manufacturing was coming inside the United States border, the stock market would be down between 30% and 70%. Because it would be incredible inflation while we have a recession, we would have stagflation — that’s the worst thing you can get. You’re talking about the ’70s or the Great Depression. The market’s not buying that, but what the market is worried about is that Trump is not really talking about fighting with a couple countries for a couple of weeks. This is global economic warfare that could go on for a couple quarters. And if it goes on for a couple quarters, you can have permanent ancillary damage. And that’s what the stock market is worried about right now.
Jonathan: So what’s the worst-case scenario here, Peter? How bad could it get?
Peter: Well, I think there’s a variety of different outcomes. I think, one, people are super emotionally charged around this. Now we’re combining people’s money, their portfolios and what they pay for things, with politics. So you’ve got two of the three most sensitive topics out there. If we could drop a sex scandal in the middle of this, we will have hit all three topics that people get worked up about talking about.
Jonathan: That’ll be a completely different podcast, Peter.
Peter: Yeah, not our topic, but you combine politics and money, it gets about as personal and heated as it can. So I mean, there’s obviously the social implications here. People are pretty upset, and there’s a cost beyond economics that a lot of people would say. I think if you look at Trump’s negotiating style, it’s very much like when you go buy a used car, you go buy a piece of jewelry or you’re in a market in another country where bargaining is normal, it’s a win-lose deal. Everyone understands the game that you’re playing, and whatever happens happens. There’s no hard feelings.
But when you’re negotiating with a partner, a business partner, or a colleague or a friend or someone you’re going to be with for forever, like another country, usually you want to have, “Hey, let’s make the pie bigger. Here’s what I want. Here’s what you want. How do we accomplish this?” That’s not President Trump’s approach. And that’s why the collateral damage of this, if there is going to be any, it’s really hard to measure. But the worst-case scenario would be that they are really talking about having these tariffs be permanent and that all of this stuff is going to get made in the United States, we’re not going to bring anything from overseas, and that’s going to be the new normal. We’re going to have a severe recession at a minimum if that happens. The stock market would have a long way to go down if that happened. I don’t see that happening, but that would be the worst-case scenario.
Jonathan: Okay, so if that’s the worst-case scenario, Peter, what is the best-case scenario?
Peter: I’d say there’s another bad scenario. The other bad scenario is we don’t have the worst-case scenario, but that it goes on long enough to cause all that damage we talked about. That would be unfortunate. The best-case scenario is that in a matter of weeks we have a negotiation with some country. That would immediately tell all investors and all of the world this isn’t a permanent thing, that he really just wants concessions and he’ll move on with the U.S. winning these hopefully little battles all over the place. If that can happen in a relatively quick period of time, you would see a quick market recovery. You wouldn’t see the collateral damage. We wouldn’t see any inflationary effect. You’d probably still have lower interest rates, so mortgage rates would come down. He could get on with having his focus beyond lowering oil prices, which is a big part of inflation. And you could really wind up in a Goldilocks world where we’re back to world with trade but the U.S. has slightly better terms, interest rates are lower, mortgages are lower, and inflation is under control. This is actually a possibility if we can start to see some signals in the near future that some of these can get settled amicably and quickly.
Jonathan: Peter, like me, you’ve been kicking around the financial markets for a long time, and we’ve seen all kinds of market declines. We had the big drop after the September 11 terrorist attacks, we had the housing crisis that spilled over into the Great Recession, we had that huge drop between 2007 and 2009. And of course, we still remember fresh in everybody’s minds is the collapse in stock prices that occurred as COVID spread. So how does this one rank? In that sort of world where we had all these scary things happen, how scared should we be of what’s happening today?
Peter: This would be, of everything you just mentioned, Jonathan, the least scary thing by a very wide margin. We’re not seeing that in the rhetoric today, but I am very confident that this is much less serious than all of those things.
Let’s just go back in time. It’s getting hard to remember the horror of these events. What makes the market go down so severely and stay down severely is people don’t know what’s going to happen next. So 9/11, of course, markets down over 40%, happens very swiftly. People are worried is there going to be a follow-on event. There’s a lot of cocooning, no one’s going outside. If I go outside, is there going to be a terrorist event that kills me?
’08/’09 crisis, default after default, domino after domino. No one really ever understood what’s next to drop. We don’t even understand how everything’s tied together. You’re not going to go buy a house in the middle of that, or a washer or dryer or a car. And COVID, it’s hard to remember now, but I’m worried if I talk to somebody, go down the wrong aisle in the grocery store I’m going to get COVID and I’m going to die. People are worried about dying. They’re not going outside because of that. Of course, you’re not going to buy stuff. All of those were external things. We needed the air to clear and have certainty before the markets recovered. And the certainty was really beyond our control. We just needed time to lapse to know there wasn’t going to likely be another terrorist event. We needed time to lapse for the housing crisis to stabilize and all that came with it. We needed time to lapse to realize that COVID’s mortality rate was lower than expected. We had a vaccine, all of those things.
This is a traffic jam where we put the roadblock in the middle of it. We know why the traffic stopped. If a week from now, if we remove the roadblock, the market’s going to recover and things are going to largely go back to normal. So not only is this not as serious, this is much more controllable. When you’re causing it, you obviously have an easier way out of it. So yes, there’s going to be a lot more turmoil, there’s a lot of uncertainty. I think the Trump administration will feed the uncertainty, because if they come out and say, “Hey, listen, don’t worry, we’re going to work our way through this,” that doesn’t give them a lot of negotiating power when they’re negotiating with all these countries or whatever they’re trying to accomplish. They want to feed the uncertainty.
I don’t think they mind the short-term fall of the markets, because they want those interest rate cuts as well. And they might — you’ve got this national debt, we’re paying a lot of money and interest on it, getting the new bonds coming out at a lower rate, you can put a little bit of debt in the deficit, you can lower mortgage rates and potentially get out of this whole tariff thing. This is actually a scenario that I don’t think is improbable. I don’t think this is the ideal way to do this, there’s probably a million other ways to do this that are better, but I don’t consider this crisis anywhere near on par with the other ones that you mentioned.
Jonathan: We talked about the best-case scenario, we talked about the worst-case scenario. Do you think that six months from now we will still be fixated on tariffs?
Peter: I think if we’re talking about tariffs six months from now, it’s going to be very limited confrontations with other countries. And I’m not big on predictions, but this is one that the downside of this going for more than two quarters with the whole globe is so significant that I just can’t imagine that that’s going to be the outcome. I think we’re going to start to see some negotiations happen in pretty quick order, probably quicker than people expect. Again, it can get really ugly before we get there, but we’re not going to know when that happens until it happens. It could be two days from now, it could be two weeks from now, it could be two months from now. I’m really confident this is not a permanent thing that we’re talking about two years from now.
Jonathan: So, Peter, it comes down to investors, what should investors be doing now?
Peter: These are the opportunities, I’ve got a few calls today of people like, “Hey, what should we be buying? What’s the opportunity?” I mean, it’s early, right, it’s only been going on a couple of days. But if we get a little bit more hysteria, and we start to see the market come down maybe six, seven more percent, there could be an incredible opportunity for investors to sell off bonds, buy equities, lean into this. You’ll never get the bottom, right? It’s like refinancing your home. Every time interest rates drop, you’re not going to get the bottom unless you do it every time. Opportunities can present themselves, but for now the diversified investors are shrugging their shoulders and waiting this out. If it gets worse, there’ll be a big opportunity.
Jonathan: Yeah, I mean, I think people should keep it in perspective. Today was certainly a rough day in the financial markets with the S&P down 5%. But year-to-date, if you have a globally diversified portfolio that includes foreign stocks that has some bonds in it, you probably aren’t underwater by much. This has not been that rough a year. It could get much rougher, but as of right now, it’s not like people should be sitting at home sobbing over their account statements. It just doesn’t seem like it’s a great buying opportunity or a reason to panic.
Peter: Yeah, I think that’s where we are today. Again, you combine politics and money … And you know what, and the psychology of this, the point drop … you know, I was on one of the cable networks today and they were talking about the point drop was whatever worst in history. Well, yeah, but move it to percentage drop, it’s not one of the worst in history. It’s something that’s happened many, many, many times. There’s a lot of psychology to this. We’ve gone a long, long, long time without a correction, much longer than normal. The points on the Dow are much more significant than normal. And so you combine not being used to volatility with these big point number headlines with politics — it’s a recipe to make an emotional mistake. I’m not hearing that, I’m hearing quite the opposite. I’m hearing people want to lean in. But it’s early. And I think for now we just observe what’s going on, see how this unfolds, and see if our predictions are right around this.
Jonathan: Peter, well, thanks for the wise words. This is Jonathan Clements, Director of Financial Education for Creative Planning. I’ve been talking to Peter Mallouk, President of the firm, and this is our special edition, April 3, 2025.
Disclosure: This is designed to be informational in nature and does not constitute investment advice. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy, including those discussed, will be profitable or equal any historical performance levels.
