Sample 2026 Tariffs and the Lessons of COVID
When last month's NMI was written in late March, we had just experienced the fastest ten percent S&P 500 correction on record—led by the hitherto unstoppable Mag 7, which were already in a bear market. All this as the dark cloud of the unknowability of tariffs spread around the world.
In the intervening month, the mystery of tariffs only deepened—climaxing in their being magically postponed for 90 days when the stock market, the bond market and the dollar went berserk, each in its own unique way. A relief rally ensued—as if, for all the world, the postponement did anything but prolong the impenetrable uncertainty.
As an investor in publicly held businesses the essential fact of what happened this month is that earnings visibility essentially disappeared. And when that happens, “the stock market” can fall as much and as far as investor hysteria will propel it. This it did.
In this as in many other respects, the current situation harkens back most directly to the Corona Crash of 2020.
You will recall that in February of that year, it became universally clear that a hundred-year virus of novel origin was sweeping the planet. Despite early and very compelling evidence that the disease's lethality was hugely concentrated in the elderly and those with serious preexisting conditions, governments panicked and—following the example of totalitarian China—shut down their whole societies, including our own.
Earnings visibility ceased to exist. Companies could not begin to estimate how much they might earn—or rather how much they might lose—if they could not even guess at the extent to which they would be prevented from operating. “The stock market”—beset not merely by economic chaos but by rapidly escalating human tragedy—crashed.
On a closing basis, the S&P 500 fell 34% in 33 days—and might well have fallen much farther, had the monetary and fiscal authorities not begun carpet bombing the economy with freshly printed money, to the ultimate tune of some six trillion dollars. Whereupon the S&P 500 regained its original peak in five more months.
Moreover, in the five years from the March 2020 trough to this February's blowoff top, the broad market compounded at a just a hair less than 20% annually. Note well: This is what it does. It doesn't just make up its losses. It soars.
A question arises: did anyone ask—at the panic trough of March 23, 2020—whether 500 of the largest, most profitable, most innovative and most strongly financed companies in the world had permanently lost a third of their intrinsic value as operating businesses? Because if they had, the answer would have been obvious: the panic-driven prices of the stocks had broken off from the enduring values of the companies, and the two were now moving in opposite directions.
This was the question investors might have been asking themselves this past month—as they watched the Index plunge, if only on an intraday basis, into what journalism exultantly called “bear market territory.”
The fact that the implementation of most tariffs has been postponed for 90 days—or in practice until tomorrow, when the president, as he does nearly every day, changes his mind—may reasonably have set off something of a relief rally in “the stock market.” But it manifestly doesn't solve anything. Indeed it can only serve to drag out companies' planning difficulties, postponing the return of earnings visibility that much further.
One can certainly hope for a slow, rolling completion of various tariff negotiations in the interim. One can sure as hell not count on any such outcome. And therefore, while steadfastly encouraging our clients to stand by their plans, we must take great care not to raise false hopes for the short to intermediate term.
If the fundamental outlook remains impenetrable in the absence of meaningful earnings visibility, we may at least begin to draw some cautious inferences about stocks. The most important of these is that all of history and logic teaches us that great companies emerge from significant episodes of uncertainty/adversity stronger and more focused than ever, as suggested by Walmart CFO John David Rainey's quote on the front page.
The COVID episode offers very useful perspective. We've already looked at how frightfully stocks were marked down at the trough of the panic, and the extraordinarily above-trendline returns they produced in the five following years. (Which were no walk in the park themselves, encompassing as they did another 25% bear market over ten months in 2022, when the inevitable helicopter-money-inflation butcher's bill came due.) Yet the Index compounded at an average annual 20%.
Invite your panicky clients to try to imagine the ceaseless agony of people who went to cash in those 33 horrific days and never got back in. Because those people are still out there: the financially undead.
But far beyond that, take clients back to the Global Financial Crisis. Tariffs may be in the process of completely reordering global trade (and then again they may not), but how serious are they likely to be in comparison to an episode in which the global credit system itself entirely ceased to function. As for several days in September 2008, after the Lehman bankruptcy, it surely did.
“The stock market” reacted very badly to that, if you remember: cratering 57% on a closing basis over 17 months, climaxing in March 2009. At which point the power of the American economy, and the resilience and innovation of the great companies, began to reassert themselves. And the S&P 500 proceeded to compound at 16% for the next 16 years, through this past February 19.
And consider this: from its intraday top at 6,147 on February 19 to its (so far) intraday trough at 4,835 on April 7 the Index was down 21.3%. Know when it was last 4,800? In January of last year. So if one has anything resembling long-term perspective: In the last two months, at the very worst, all we've had to give back was the last one of those 16 amazing years!
As I write, the S&P 500 is at 5,400, down about 12% on a closing basis. We were last at 5,400 as recently as August 2024. So far, then, I have the greatest difficulty in seeing this “unprecedented cataclysm” as much more than a classic, event-driven correction of a wildly overvalued, terrifyingly concentrated market. Why is no one saying this?
The answer to that not-quite-rhetorical question is of course the two-word qualification so far. It's possible that, rather than more clarity over tariffs and trade during these next 90 days, there emerges even less. It's possible that, in choosing to make tariffs the first great crusade of his presidency, Trump has imperiled the extension of the 2017 tax cuts. Anything's possible.
All we can be certain of is that financial media—which have to write and speak a million words every day whether there is any real news or not—will fill the 90-day void with largely negative narratives, agendas, invectives and speculation. What we can be sure of, in so many words, is that journalism will work ceaselessly to impeach our clients' confidence in the soundness of their long-term plans. I offer in evidence of this two absolutely classic examples of the way media actively encourage investors' worst instincts.
The first appeared in the economically illiterate New York Times as soon as the equity market had had its lightning-fast ten percent correction. Titled “Ride Out the Market Turmoil? Not These Investors,” it extols the deep thinking of a few carefully selected individuals who should never have owned equities in the first place. Far worse—if only because the Wall Street Journal should know better—was the immediate post-crash gem “Market Turmoil Shatters Long-Held Beliefs on Investing.” Here we are treated to another selection of seemingly rational individuals, advancing what they see as sound reasons for making what may well turn out to be the greatest financial mistake of their entire lives.
Soon enough, the tragedy will again be complete, when sufficient volumes of common stock have been returned to their rightful owners—a process that, as Bloomberg reports, is already well underway. “Corporate insiders scooped up shares of their own companies at the fastest pace in 16 months as the S&P 500 sank in March, and they kept buying at an elevated clip as the rout accelerated this month in the wake of President Donald Trump's global tariff rout.”
Until the inevitable day when the great permanent uptrend of earnings, dividends and share values reasserts itself—if indeed it hasn't already—we may sit, of a chilly spring evening, and warm ourselves by the fire of the VIX.
Since 1990—and until the most recent unpleasantness—the VIX had closed out the trading week above a reading of 45 on 20 occasions. You will begin to see what must be coming when I report to you that all—I repeat all those 20 readings are clustered in 2008, 2009 and 2020, some of the greatest long-term buying opportunity years of this century. The most recent took place in the COVID panic month March of 2020. Until now.
On Friday, April 4, it happened again, at 45.3.
There has never been a 12-month period following one of these readings in which the S&P 500 failed to achieve a positive total return. The average 12-month return was 39%. The average five-year return was 139%. (Source: Charlie Bilello)
The future twists and turns of the Tariff Trauma remain impenetrable to us; likewise their effects on the markets. What we can know, as Behavioral Investment Counselors, is that massive episodes of investor panic—such as that which we've observed over the last ten weeks—aren't usually the beginning of something lastingly bad. Often quite the contrary. And thus quite the opportunity for the goal-focused, plan-driven long-term equity investor.