Economic War Games
Second Quarter 2025
“A STRANGE GAME. THE ONLY WINNING MOVE IS NOT TO PLAY.” – WOPR System, from War Games (1983)
During the first quarter of 2025, U.S. equity markets cooled off from all-time highs, as trade war talk shook the nerves of investors and helped push the S&P 500 down roughly 5% through March 31.
The new Trump administration began moving on their agenda to use tariffs and economic protectionism as a significant foreign policy tool. American stocks were already expensively priced coming into 2025, and the proposed tariffs did little to reassure investors that revenue and earnings growth could continue at their current pace.
In addition, the chaotic manner in which tariffs were applied (on/off almost daily, with sector- and country-specific tariffs changing rapidly) created significant and broad-based uncertainty surrounding the economic environment, and stock markets hate uncertainty.
Our quote above, from the critically acclaimed 1983 film “War Games,” expresses the opinion of an AI system in charge of the U.S. military regarding the option of nuclear war. We could say the same thing about economic tariffs. As history has shown, restricting free trade with tariffs and trade wars is a game that no economy across the globe should want to play.
Protectionism—A Loser’s Game
The concept of economic protectionism is not a new one. Many countries throughout history have levied tariffs on incoming goods produced overseas for various reasons. In the U.S., tariff levels fluctuated from 20% to 40% on average during the 1800s. Indeed, for a large part of the history of the United States, customs duties were the majority of U.S. government revenue. This lasted until 1913, when the income tax was introduced permanently, and expanded from there as a new source of revenue.
A striking and broad-based example of protectionist tariff policies and their consequences is the Great Depression. The Smoot–Hawley Tariff Act of 1930 exacerbated the economic calamity in the U.S., as imports and exports collapsed by roughly 65%.
Imposed following the stock market crash, the act was intended to protect certain industries from cheap foreign goods being dumped on U.S. markets. Henry Ford and most economists at the time called the policy “an economic stupidity,” and were later proven right as other nations retaliated in kind. (Smoot and Hawley both lost re-election the following cycle, and FDR used the tariffs as a critical campaign tool against Hoover in 1932).
These tariffs hurt all participants, pushing global economies lower and driving unemployment higher. This proved to be a key factor in aiding the election of radicalized regimes that exploited public discontent—an instability that ultimately contributed to World War II.
One can only hope policymakers in the Trump administration will heed these historical lessons and pull back from the tariffs announced on April 2nd that put the global economy at risk. Free trade has been beneficial for all countries over time. Developing nations with raw materials and low-cost manufacturing are able to boost GDP and living standards rapidly with exports, while developed nations can continue to acquire raw materials and other goods for more advanced manufacturing and services at low cost.
Uncertainty
With little clarity on import costs for both finished goods and raw materials, U.S. companies across all sectors struggled to plan for the long term. The first quarter saw a record number of imports as American companies tried to get ahead of potential tariffs. Beyond that, CEOs expressed uncertainty during quarterly earnings calls, unable to project supply or demand for their products even later this year with so many government regulations in flux.
This uncertainty trickled down to investors, who pulled back from equities during the first quarter of 2025. With stocks already at elevated levels coming into the year, this was all that was needed to push many expensive technology-related stocks off their all-time highs. At the same time, European stocks (priced cheaper than U.S. equities) moved higher on expectations of increased government spending for defense.
What’s Next?
As the eventual level of tariffs and government spending cuts are still in question (and changing on a daily basis) we would expect to see continued volatility in U.S. equity markets.
The upside of this for long-term investors (we always try to see the silver lining) is that stock valuations may become more attractive with future drawdowns. Also, diversified portfolios, those holding bonds and cash reserves in addition to stocks, should hold up better during this volatile period and provide a cushion to ride out these stock market swings.
We stress a long-term focus for our clients, and the ability to purchase equity in growing companies at more reasonable prices should benefit all portfolios for the long term here at Mitchell Sinkler & Starr.
– Mitchell Sinkler & Starr’s Portfolio Managers
P.S. Below are links to two Investment Insights we authored previously regarding market timing and bear markets, which we thought were pertinent for clients during times like these.
The Mistake of Market Timing | Mitchell Sinkler & Starr
Fear The Bear? | Mitchell Sinkler & Starr
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