The Hidden Costs of Tariffs: Who Really Pays the Price?

it's also erased its post-election gains, and for those technical folks out there who are watching the S&P 500, or the NASDAQ composite, they are barreling towards being oversold. Suffice to say uncertainty, anxiety is permeated the market. But here's the thing, folks, as Lindsey and I will talk about, we are not yet

out of the woods, and we would argue that with what's to come, you've got to be mindful before making any moves. And coming up on this podcast, we're gonna be talking about Trump tariffs and the responses by Mexico, Canada, and China. Why we're listening to what retailers have to say about tariffs and some of the data that we'll be paying close attention to ahead of Fed chair Powell talking to the markets on Friday, all that much more on this edition of the What Does It Mean Podcast. 

All right, Lindsey Bell. Good to see you. Sorry about that intro. I was so in the moment that I lost my head, but how are you doing, Lindsey?

[00:01:29] Lindsey Bell: I'm doing all right. Just trying to make sense of all these moves in the markets and all the, political tariff news that we're getting. How about you?

[00:01:39] Chris Versace: I am right there with you. I, the question that I'm paying attention to is, where are we in the market? The S&P 500 and the NASDAQ composite, like I mentioned, as we're talking, not yet oversold, but we could very close, very soon get there.

That, that kind of sets me up for maybe, we'll see something similar to what we saw last August, right? a lot of market pressure, great buying opportunity emerges. But my concern here is when is that opportunity gonna emerge? And I, say that because, state of the Union address, we've got a lot more economic data coming, which I don't think is gonna be very good.

We've got companies that are gonna be talking about the impact of tariffs. the Friday employment report. Powell, like I mentioned, you know, Lindsey, I'm looking for good news here. What do you got?

[00:02:30] Lindsey Bell: I know. I think that's, what investors are grappling with, right? We're all looking for that one data point or the one you know, person that's gonna tell us how things are gonna shape up, what growth is really gonna look like in the future. And I think that's gonna be really difficult to find, which is unsettling for investors. I think what we learned this week is that the risk of tariffs. Wasn't fully baked into the markets.

That's why

[00:02:56] Chris Versace: No,

[00:02:56] Lindsey Bell: we've been seeing so much red at the top of the week. I think people were looking, hoping for a last minute deal like we got in February or a delay something like that. if you recall, in February, the market was trending down into that deal, but then it rebounded and hit new all time highs before.

these fear, fears, rising fears of, global growth or a US growth slowdown really, took off.

[00:03:23] Chris Versace: you and I talked about this. We didn't do it on the, on last week's podcast 'cause we couldn't have, but wow, that negative revision back to back negative revisions actually in the land of Fed GDP now model.

I think that really scared some folks. It it was like a wake up call as to hey, and this is before the tariffs go into effect.

[00:03:43] Lindsey Bell: Yeah. I think that along with even the manufacturing data, while on the surface it still was an expansionary territory, what we saw as the new orders. The new orders were pretty negative and prices continue to go up.

So it, the question is that really demand driven or it doesn't sound like with new orders, or is it really these companies are getting ahead of tariffs. So yeah, I think that's, what makes people nervous. And I know we're gonna talk about Powell later, but it's really this inflation scare too.

'cause it's just, it leaves the Fed in a really difficult place. You've got high inflation that's being sticky or stubborn potentially could go higher, even if it's only temporary, as it typically is in the form of tariffs, but but also while growth is slowing and there's this ma massive uncertainty.

[00:04:29] Chris Versace: Yeah, I think ultimately by the end of the week, that could be the question that emerges, right? If the economy is slowing, if layoffs are creeping up. But inflation is, to use your words sticky. But if we look at the ISM manufacturing PMI accelerating higher. What is the Fed going to do as folks?

Start ringing that word, Lindsey, ringing that bell. Say it with me, stagflation.

[00:04:54] Lindsey Bell: I don't wanna say it. I don't wanna say it out loud.

[00:04:59] Chris Versace: look, we, to be fair, we do have a bunch of data that's coming, but before we talk about that and what, it could mean, how we think it might shape what Powell has to say on Friday.

Let's talk a little bit about these Trump tariffs that went into effect. to your point, I think the market was looking for a last minute reprieve, but lo and behold, I think coming after that, and I'll say it, you don't have to agree, but I'll say it, that disastrous, conversation with Zelensky in the White House and the warm reception that he had with the UK.

I wouldn't, my, my thinking is that really got, Trump's back up and he was gonna show folks who's boss, that sort of thing. So I'm not surprised that he went forward with the tariffs. But, 25% tariffs on Canada and Mexico, China, another 10%. and here's some data, Lindsey, just to set the stage for that.

this group out of Yale. The Budget Lab, they said that those tariffs are the equivalent of a seven percentage point, tax hike, putting, the tax rate at the highest level it's been, I can't believe this, 1943 if we go back that far in the way back machine. And they also said that, those tariffs will increase

average prices paid by people like you and me, somewhere between one and 1.2%. for the average household, it's like $1600 to $2,000, and that's before reciprocal tariffs. And before Trump, responds to reciprocal tariffs, and we have reciprocal tariffs. The White House is studying, during the month of March for potential April implications.

Lindsey, I, sticky at a minimum, inflation moving higher, I think.

[00:06:46] Lindsey Bell: here's the problem though, is like what the market's really grappling with is, yes, we were expecting or hoping for a deal and a deal might not necessarily be off the table, right? And that's, that therein lies the problems.

is this the real tariff? 25% on Canada and Mexico, plus whatever is expected to come? The reciprocal. Tariffs and other tariffs by April 2nd. or are we going to reach a deal? Will these tariffs be lower? Will, like we talked with, last week with Arthur Laffer about tariffs, will, is there potential for tariffs to actually come lower than where they were previously?

So that's what the market really is grappling with. If we look back at 2018 to 2019, granted the tariff implications were much smaller than what we're currently expecting or experiencing. but the increased inflation was only a 0.1 to 0.3% impact. It impacted neg negative, negatively impacted GDP by 0.3 to 0.5% from 2018 to 2019.

So, the economic impact was less negative than what the market impact or investor sentiment or consumer sentiment may be experienced during that same time period. And so that is where investors are really struggling. And I think that's why the market feels like it's in a free fall right now, because if these, tariffs do stay in place, the numbers that you just talked about could be real.

Plus, there's more to come that we don't even know about, right? And so that impacts earnings, that impacts economic growth much more negatively than the numbers that I talked about. So that's, the rub.

[00:08:25] Chris Versace: So totally agree, that's the rub. Totally agree on that front, Lindsey. But I will say too though, I think we have to consider that the consumers are in a different place today than where they were in 2018, 2019.

they've been contending with inflation, for some time now. We've already seen even before the impact of tariffs, inflation was on the move higher. and at the same time, we look at some of those consumer debt levels, man, oh man, they have moved higher as well.

So they may, consumers may not have as much to tap. My bet is that we're gonna see, probably a greater trade down. by consumers and what we've seen before. And I think as investors it means we're gonna have to be very mindful as to, where they're likely to go. Look for where the dollars go and, follow through is what I would say.

but with that, it's, an interesting time too, Lindsey? Because. We are only now starting to get that part of the earning season, the tail end, better known as retailers. And the reason behind that is most of these tend to have January fiscal year end. So you roll forward 45 days.

Boom. Bingo. Bango bongo as President Trump might say. And here we are, in the midst of retailer earnings. And last week, we heard from Walmart, we heard from Home Depot. They said, if I remember correctly, that, oh, we haven't really baked in the impact to tariffs yet. I think they were waiting to see what would happen.

But now Lindsey, we're starting to hear from Best Buy, we're starting to hear from Target. What are you hearing?

[00:10:05] Lindsey Bell: Yeah, I think it's interesting the timing of these different earnings because when we heard from Walmart last a week and a half ago on February 20th, by the way, that was like the day after the market hit a new all time high.

their CFO talked about the consumer spending patterns is steady and that there's not been any sharp changes in what we've seen. Those are direct quotes from him. But they did talk about

You know, we do, we haven't baked in tariff impacts two thirds of our, goods come from the US but they did give conservative guidance. So in a way, I think in the back of their minds, they were preparing for some of this, even if it's not officially baked into the numbers. Because what you are hearing from Target this week from Best Buy, like you just said, is a much more concerned

tone about the impact of tariffs and how quickly those price increases can float through to the consumer. And so I think, again, talking about now is different than 2017 or 2018 when the, when Trump 1.0 put tariffs into place. it is a, it's a definitely a different environment from a consumer perspective.

and, and, consumers do one of two things, right? When prices go up, they either stop buying those goods or they try to replace it with cheaper goods, or they simply, supplement it with something else. So I think we're going to see if, these tariffs stay in place. If they're continue to be escalated over the course of the next month, when we learn more about other, items that are to be taxed, tariffed, taxed, then that you're gonna see, you're seeing it in consumer sentiment, right?

the Michigan, and the conference board numbers dropped very sharply in their most recent reading. And part of those surveys they talked about inflation, the University of Michigan, five year outlook is for 3.5% inflation and inflation rate much above the 2% target for the Fed, right?

Which means the consumer's buckling down and getting ready for higher rates and they're gonna make spending decisions based on that. And by the way, that also filtered into consumer spending numbers in the January, data. Granted, usually you do see a pullback from consumer spending on January After a holiday selling period. but it's just, that's why we need more data points in the market. I think it puts the market and investors, consumers, business owners, like in this weight and see mode, which isn't good for economic growth.

[00:12:34] Chris Versace: Oh, definitely not. 'cause when there's uncertainty, what do you do? you, wait to see what happens.

So to the extent that we get more clarity on, what goods tariffs are going to be on, perhaps that facilitates some, better than expected spending, we will see. But, just two things I wanna follow up on. one, Lindsey, you said, bracing for higher prices, Target said we could see higher prices

in the coming days, not weeks or months. Days. And then on, on top of that, I don't know if you saw this article, but I'll, mention it. you talk about trade down, you talk about replacement. given the sky high price of eggs, do you know that people are not expected to color eggs for Easter this year?

They're buying potatoes and they're coloring potatoes. This is ridiculous, but just probably the best example of a trade down that you could, imagine, because potatoes are still relatively cheap,

[00:13:36] Lindsey Bell: but they're ugly. They're not cute like little eggs.

[00:13:42] Chris Versace: I, I will say that, I've eaten a lot of potatoes, sweet potatoes, Japanese sweet potatoes in my time. You do get some pretty funky shapes, and it's not as, homogenous as an egg. So I, do think folks are gonna have a tough time figuring out how to color and decorate these potatoes.

Plus, you hide it in the, you hide it in the yard. It looks like a rock. Doesn't look like a, decorated egg. It's ridiculous. but, we are gonna have some other, retailers reporting and I think both you and I will be mining their comments. Lindsey, I'm talking Macy's, Footlocker, Nordstrom's.

And I also think that we'll both be paying very close attention to what companies have to say as we embark upon the March Investor conference season. just think about it, folks. we're now, Three, three and a half weeks, let's call it to the end of the quarter. Everybody's gonna be leaning in what's the tone of business, but what are they seeing and preparing now for the impact of tariffs on their businesses?

My concern, Lindsey, is that we're gonna see earnings expectations for, really the second quarter and the back half of 2025 really start to move lower. And as that happens, folks are gonna sit there and go, that S&P 500 multiple, not as low as I thought it was.

[00:15:04] Lindsey Bell: No, I think so. And what you have seen is earnings estimates have fallen, More sharply than is typical this time of year for even the full year estimates for the first quarter and for the full year. And so I do think that analysts, and I think that reflects analysts, cautionary tone, sentiment as well as CFOs in particular too. so I think that some of it's being baked in, but there's just no.

This could go either way, there could be more negativity to the numbers, or if we get positive headline on news. I said on CNBC the other day that if. for the market to stabilize or even turn around for the market to really turn around, I think you just need the narrative on not just, but you need the narrative on tariffs to turn.

And that can really change, the outlook for a lot of different things. And I think earnings is one of those things that can s at least stabilize the earnings outlook, which by the way, if you look at backset numbers, looking for 12% even after the recent reduction. 12% earnings rather than 2025.

That's not what in a recessionary environment. So to your point, does that mean they have to come in more? Or not. And yeah,

[00:16:20] Chris Versace: I, I think, the big word Lindsey is going to be duration. How long are these, upsize tariffs on for. but ultimately, and you hinted at this in our, from our conversation with Art Laffer last week, that look, we know that there's going to be pain, right?

To get to the other side. It's just a question of how long do we have to slog through before the benefits happen, whether it's a deal or something else. and I, will say, I think you're right, to the extent that the market does become oversold, it's not gonna take a lot to pop it.

[00:16:58] Lindsey Bell: exactly.

So, it, is, it's a duration and the depth during the duration that we need to get a better feel on, because as if you're an operator, you need to know what that means from your spending perspective. the other thing I wanted to mention too from, the retailer perspective that we didn't cover in the last section was, they're talk, Walmart and Target both talked about lower profitability.

Going at least into the first quarter. and I think that also points to, these are obviously value oriented retailers and it, points to the, price sensitivity of their consumer and the consumers in general. And so I think that it's 'cause you have two choices, right? If, you get tariffs, you and you either push up your prices, which you've heard a Best Buy talk about and others.

It could Target talked about for some, categories. you either push up your prices or you take the hit. It depends on the industry or the sectors. But overall, when you look at the S&P 500, operating margins are expected to reach almost 17%, which would be an all time high, this year.

And so they, investors aren't gonna like it if, companies have to take a hit to margins. But if it's in the name of continuing to increase sales, is it something and ultimately earnings, it's is it something that you can accept? And that's, not gonna be a comfortable conversation, but

[00:18:27] Chris Versace: no.

and you mentioned a bunch of different companies. I did see right before we jumped on that Chipotle said that they are not going to increase prices, which to your point, means that higher input costs, prices staying the same. We gotta watch the margin line, and most likely the direction is gonna go lower.

That probably means a little less EPS, but. We'll see how, we'll have to see how it plays out. Now I joked Lindsey earlier that I wanted you to gimme some, gimme something good. kinda as we sit here and just map out the rest of the week, I don't think there's a lot of good data coming. So we've got the ISM services, PMI, we've got the ADP employment report. We've got the February employment report. we got the Fed Beige book, and we got Fed Chair Powell coming and I just, Call me cynical Lindsey, if you want, but I just, I don't see a lot of positive data that can possibly, help the market rally at least before the end of the week.

I think we've gotta get through all of this data, let the market absorb it. What do you think?

[00:19:33] Lindsey Bell: See, I think that the silver lining could be found on Friday. Of course. I don't know how. That messes things up, but I think that Friday you look at the non-farm payrolls coming out, they're expected to be up over 150,000.

The unemployment rate expected to stay steady at 4%. Wages expected to continue to grow again at 4.1%, which is what we saw last month. Which, fuels maybe the inflation conversation. But I also think that, I also think it helps to support the fact that, the, potentially, the consumer can, in a way remain resilient if their earnings are continuing to grow, if they still have jobs.

So that's where I'm looking for a little silver lining.

[00:20:21] Chris Versace: well in this

[00:20:22] Lindsey Bell: wait and see mode and we need some good news. You're right.

[00:20:25] Chris Versace: Yeah. I, just, I don't think we're gonna get that. Lindsey and I, think the reason for this is, again, take a look. You pointed this out. Let's take a look at the, February manufacturing PMI from ISM. Employment contracted.

If we see something similar in the ISM services PMI for February, I just find it hard to believe that we're gonna have job growth, above a hundred thousand, 150,000, especially given the layoffs that have been announced and what we're seeing, the early, I'm not gonna believe I'm gonna say this, but the early workings of Doge.

So I, just, I get a little hesitant, but. On the other hand, I will say this, if we see a string of bad data and Powell comes out once that happens and all the weeks bad news is in, if the market is oversold at that point, maybe we see a claw back rally emerge late on Friday into the weekend with the notion of it can't get any worse.

[00:21:27] Lindsey Bell: The, other thing I would say that I'd be looking for is in a, it can't get any worse scenario. Is. Is really the tenure yield at 4%. I feel like that, like the, lowering of the 10 year yield has not been a boost to stocks as we had seen prior to, let's call it, prior to the Trump administration, when we saw the pullback in the 10 year, that was like a buy signal.

And, but now it's not. And that's another, I don't know, I'm just throwing that out there.

[00:21:58] Chris Versace: Let me, ask you this, right? yeah, you know the 10 year has trended lower. The CME Fed Watch tool is pricing in three rate cuts, but you and I watch inflation very closely. I don't think, forget what I think.

Do you think that Powell is gonna blink?

[00:22:16] Lindsey Bell: Do I think Powell's gonna blink? I don't think so. I don't think he's going to, 'cause I think there's just, there is way too much uncertainty because he knows, as we discussed, that like these tariffs. They could change at any minute, And so I think there's that risk.

I think that inflation is sticky again before the tariffs are getting put into place. And if we get decent jobs numbers like I'm anticipating on Friday, it like, it makes it really difficult for the Fed to cut rates.

[00:22:49] Chris Versace: Totally, I wanna put the microscope on you, Lindsey.

If the CME Fed Watch tool says three rate cuts. What does Lindsey Bell think for the year? Do we get any

[00:23:01] Lindsey Bell: I think it largely depends on what happens, what transpires from a policy perspective over the next couple months. That's not a great answer, right?

[00:23:11] Chris Versace: No. so I'll say this, earlier this year before terrorists went into effect, I was in the camp of, one to none.

And we

[00:23:20] Lindsey Bell: Yes, me too. We were in the same camp. We were in the same, yeah,

[00:23:22] Chris Versace: yeah,

that's 'cause you're a smart fundamentalist like me. So the, as we see these things happening, unless we see the economy really roll out of bed. Really fall, over. I find it hard to believe that the Fed is gonna deliver a rate cut this year, the Fed could have a tough if the economy falls out of bed.

And the second quarter, I think, again, like we talked about with Art Laffer last week, the second quarter could be challenging as all of this kind of comes together for a potentially perfect storm. the Fed might have some tough decisions to make, Unfortunately, we'll have a lot more data to, chew through and tell us what we think.

[00:24:05] Lindsey Bell: Yeah, let's all just hope that this, is a pullback that is a buying opportunity.

[00:24:12] Chris Versace: we will see. So, far I'm inclined to think that, but we will see. All right. When we come back folks, Lindsey and I are gonna share what stood out in our conversation today and wrap up this edition of the, what does it Mean podcast? 

All right, Lindsey. What? I have to say that was a really spirited conversation we had today. I like it, I like it when we don't necessarily agree. I, I find that we're too like-minded sometimes, when we don't necessarily agree, it really allows us to pull out different perspectives, different points.

But I suspect our listeners find even more helpful. but with that in mind, what stood out to you in our conversation, Lindsey?

[00:24:55] Lindsey Bell: Your negativity! No,

no, I think I, I think that, it, I think that our two different viewpoints, not that I'm super optimistic, but I'm like, I'm trying to be constructively optimistic. because there is still, the current data on the ground is still. Supports earnings growth and it supports economic growth, in my opinion.

it that could change at any mo moment in time. And I think it really is emblematic of what investors in general are concerning, are dealing with right now. It's this tug of war. It's a tug of war between is the world ending, not the world is the US growth story. US exceptionalism, as a lot of strategists have been calling it out

there. Is that story over? Or is it just, we've gotta get through this tough period of negotiating that the Trump administration is doing to create a, more fair environment, trade environment for our country. And so I it's, hard to tell 'cause you could go either way. and so I think that's, it was just really an emblematic debate.

[00:26:07] Chris Versace: Yeah. No, I would counter and say I'm not being negative. Or pessimistic. I'm just being a realist. That's all I've, gotta, let the data talk to me, as I like to say. And as I've shared with folks, before, HOPIUM is not an investment strategy. I can't hope that it's going to work out.

I. But I do think though that your point about, focusing on the data and, how maybe there, and we talked a little bit about this last week, but I, think you're, getting at this again, is that maybe, I. That, sorry, that as investors, we need to be mindful that sometimes expectations can be too negative, right?

And there that can create the opportunity if we're looking forward to opportunities. I would say, I think that's, I think that's fair, but I also recognize that, man, we've got a lot of stuff to get through this week, maybe better days next week. That's, my, sunny side message.

How about that? Maybe better days next week.

[00:27:10] Lindsey Bell: Maybe because, you know why I meant to mention this earlier is investor bearishness reached like extreme levels. If you look at the AAII investment survey.

and it, reached levels that we saw in late 2022, September, end of September, 2022, when we had another growth scare.

And the market actually bottomed. It also looks, it's not nearly as bad though, as on a bull bear spread basis from the 2017, 2018 negative sentiment that we had, when the first round of, tariffs were going into place. but anyway, it's at these extreme levels that you could see market balances too, which is the whole point is, it means that this ne isn't necessarily a situation to get out of the market. It's kind of just review your portfolio.

Where you're invested and why. Does it still jive with your long term investing strategy?

[00:28:04] Chris Versace: Totally agree. Dust off the investment thesis, refresh your data points, know why you own something. If you can't answer those simple questions, then maybe you should reconsider, I don't know, maybe, but that's, that's a personal decision, any, closing remarks, Lindsey, before we get outta here?

[00:28:25] Lindsey Bell: No, we're, gonna, we're gonna be this, we'll be here with you through it all. Check us out next week, right?

[00:28:34] Chris Versace: yes, Lindsey, we will be back next week. And as Lindsey had to say, we will be guiding you through all this. There's a lot of data.

So please be sure to check back, but between now and then, if you need to get more from Lindsey, march on over to Clearnomics. See what she's posting on LinkedIn. If you need anything from me, Chris Versace, march on over to the Street Pro Portfolio. Thanks for listening folks.