Revised as of April 4, 2025

Market Setback

U.S. stock indexes had negative returns for the first quarter, a period that included a 10% decline from February highs. While a setback was arguably overdue, after big gains in 2023 and 2024, turbulence was worsened by significant policy uncertainty. Because trade tensions are especially important now, this is the primary topic of this review. This gets close to politics – an area usually avoided – so we endeavor to do this with careful objectivity.

Trade and Protection

The theory of free trade was first popularized by Adam Smith in his 1776 book The Wealth of Nations. He argued that countries should focus on producing goods that can be made most efficiently and trade for the rest, rather than trying to be completely self-sufficient. David Ricardo later improved on this idea with his theory of comparative advantage in 1817. He emphasized that countries should specialize in what they do relatively better. These ideas, supporting specialization and cooperation, are still the foundation for modern trade economics more than two centuries later. Trade allows Norwegians to consume oranges while Costa Ricans have fuel for their cars. Brazil exports coffee to Japan, and Japan ships electronics to Brazil. The U.S. sells aircraft to Mexico and buys auto parts from Mexico. Of course, in daily life we have countless examples of specialization and interdependence. The barber doesn’t make loans, and the banker doesn’t provide haircuts. The heart surgeon doesn’t repair cars, and the mechanic doesn’t install stents. Specialization and trade make everyone more productive and better off.

America has been in the vanguard of free trade since the end of WWII, but significant tariff increases were announced on April 2nd. This is important for investors, because tariffs can distort markets and reduce competitiveness, with economic costs exceeding benefits. Tariffs may provide short-term relief for certain domestic industries, but usually lead to higher prices, inefficiencies, and retaliation from trade partners. A good example from recent times is the steel tariffs imposed by President Bush in 2002. Higher steel prices led to significant job losses in steel-consuming industries, such as manufacturing and construction, and triggered retaliatory tariff measures from Europe. Bush’s tariff policy was abandoned within two years. Similarly, import quotas on Japanese cars were imposed by President Reagan in 1981 but rescinded in 1985. The import quotas did not strengthen American car companies, though one salutary impact was that manufacturers such as Toyota and Honda relocated production to the U.S.

Productivity and Progress

Barron’s recently reported that America’s share of global manufacturing has dropped from 25% to 15% since 2001, when China entered the World Trade Organization (WTO). Many hoped China’s economic progress would ally it with Western values, but it has been more adversary than friend, and it has gained at the expense of American labor. Narrowly targeted tariffs, focused on China, might meet the objectives of tariff proponents – punishing an unfair competitor and restoring U.S. jobs. However, manufacturing has profoundly changed over several decades because of technological advancements. A broader “trade war” involving many countries will not reverse this secular trend.

• U.S. manufacturing output has nearly doubled over the last forty years, yet employment in the sector has declined to approximately 10% of total employment today from 31% in 1980. Major progress in automation and efficiency has allowed factories to produce more with fewer workers.
• Agriculture offers an even more compelling example. More than 30% of Americans worked on farms a century ago, but less than 1% do so today. Yet production skyrocketed over this century, with America serving its own needs and becoming an export powerhouse for the world. Technology made this possible.
• We should remember unemployment in the U.S. is only 4% today, a historically low level. America has a shortage of labor, not a surplus. Even if tariffs helped propel more domestic manufacturing and job opportunities, we would probably need to “import” workers from other countries.

America’s economy has not been eviscerated; it has evolved. The U.S. is still a manufacturing and agricultural juggernaut, and it will be for years to come. Moreover, in addition to exporting goods and services totaling almost $2.5 trillion in 2024, American multinational companies derived significant revenue from overseas subsidiaries, so that almost 40% of S&P 500 company sales came from foreign markets. American businesses and investors have benefitted handsomely from prosperity in other countries.

Our continued economic supremacy will be driven by productivity rather than protection. As we have noted in prior reports, American companies have led the transformative business achievements of recent times in digital commerce, mobile communication, cloud computing, healthcare, and artificial intelligence. Tax and regulatory policies should encourage this intrinsic dynamism in American capitalism. Trade policies should ensure fairness and foster global demand for the innovative products that result from our technological prowess.

Sadly, the chastening effect of a market selloff may be necessary to encourage reconciliation. Just as “bond market vigilantes” tempered fiscal policies in the 1990s, “stock market vigilantes” could prompt moderation of tariff policy.

Resilience Plan

Bartlett was not exalted after 2024, and we are not downcast today. Investing is a marathon, not a sprint. Time-tested strategies helped us navigate prior difficulties. Bartlett managed through the aftermath of terrorism in 2001, a global financial crisis in 2008, European currency crisis in 2011, trade war in 2018, pandemic in 2020, surging inflation in 2022, and a bank panic in 2023. We can reflect on some of these episodes and remember opportunistically buying rather than reactively selling. We are looking for opportunities now, amid the tariff-induced market selloff.

Because turbulence is inevitable, risk management is a constant endeavor for Bartlett, not something we embrace only in stormy times. Experience has validated the importance of asset allocation and diversification, based on careful financial planning. These safeguards can seem restraining in good times but are vindicated when difficulties occur. We believe investments grounded in realism, rather than optimism or pessimism, will help us achieve good long-term results. Most important, a disciplined strategy should minimize the behavioral penalties investors suffer by getting in and out of securities based on market timing, a practice that can be especially seductive in turbulent times.

Concluding Comments

We are grateful for your trust and loyalty, especially during difficult market conditions. Rest assured Bartlett is built to last. Our company will add new employees again this year, assuring a high level of fiduciary service while promoting business growth and continuity. Please recommend us to friends and family who could benefit from our services. Also mention Bartlett if you meet an impressive CFA or CFP® who is looking for a great place to build a career.

DISCLOSURE

This material provided by Bartlett Wealth Management (“Bartlett”) is for informational purposes only and is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy, or investment product. Nothing in these materials is intended to serve as personalized tax and/or investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Past performance is not a guarantee of future results. Opinions expressed by Bartlett are based on economic or market conditions at the time this material was written; actual economic or market events may turn out differently than anticipated.  Facts presented have been obtained from sources believed to be reliable.  Bartlett, however, cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source.  Any reference to an index is included for illustrative purposes only.  Indices are unmanaged vehicles that serve as market indicators and do not account for the deduction of management fees and/or transaction costs generally associated with investable products.