Jack Meskunas, executive director of investments at Oppenheimer & Co., gives his views on the impact of tariffs and a Trump White House
Age-old wisdom in the world of investments is that no matter what is happening ‘in the markets’ at any given point in time, it never is significantly different. Even Mark Twain was alleged to have said: “History doesn’t repeat itself, but it often rhymes.” What about now? Investors in general — and insurance companies in particular — find themselves navigating market gyrations that seem very different this time.
While this article may seem to be a piece on politics, it isn’t. But politics needs to be addressed when discussing investing for insurance companies because government policies, executive actions, regulations, and taxation policies affect interest rates, corporate earnings and equity valuations. Interest rates affect bond prices, equity valuation changes affect stock portfolios and the portfolios of many alternative investments as well. All are the primary foundation of the economic underpinnings and ultimately the success of any insurance company investment programme.
Trump 1.0 vs Trump 2.0
Under Trump 1.0 we saw some volatility, but the overall market movements were to the upside as his administration had a relatively narrow focus on increasing business, reducing regulations, and cutting taxes for both individuals and corporations. It was clear from Donald Trump’s executive orders and actions that while he is a noteworthy CEO, he was a novice President. In his parlance, “swimming in the swamp” required an eyes-wide-open approach to navigate the dangers that lurked everywhere. On the whole, however, his cabinet was filled with highly skilled business people and politicians who guided him (some say limited him) to a more mainstream approach to the presidency.
Trump 2.0 has started very differently. President Trump came back into office with experience, focus, and a cabinet there to do his bidding — not reign him in. The word bandied about is ‘unprecedented’ when describing his speeches, executive orders, and cabinet choices. Many view his agenda as retaliatory and his tariffs as something the country has never seen before. Certainly coming into — and just after — ‘Liberation Day’ we saw market volatility that was unprecedented, with wild swings in interest rates and equity valuations.
In a period of two days following the 2 April Liberation Day announcements, over US$7 trillion of market capitalisation was wiped out. To put that into perspective, the market capitalisation of the entire world was US$128 trillion by the end of 2024. The US equity market capitalisation was US$62 trillion, and the entire world’s public companies had total annual earnings in 2024 of just under US$6 trillion. So that two day selloff was a loss of an entire year’s worth of earnings for every public company in the world, over 11 per cent of the US market capitalization, and 5.5 per cent of the market capitalisation of all the public companies on earth. Liberation indeed!
Tariff, or tariffying?
What was Liberation Day and why did it have such a big effect on the global markets?
The White House announcements on 2 April amounted to a newly proposed global tariff scheme. Every country in the world was assessed tariffs ranging from 10 per cent to 145 per cent. Only Russia, North Korea, Cuba, and Belarus were ‘spared’, as they were already subject to punishing US trade restrictions. Canada and Mexico were not on the list as new tariffs averaging 25 per cent were already put on them weeks earlier.
Of particular note were the tariffs on China and other Southeast Asian countries. As far as China was concerned, the 100 per cent tariffs bilaterally proposed amounted to an extinction event for trade between the two countries.
Between the tariffs proposed, and the follow-up suggestion that Federal Reserve Chair Jerome Powell could be “fired” (which he can’t be), the markets were in freefall from 3-8 April until the administration was compelled to pause the implementation of tariffs. We all learnt that Powell’s job was in fact not on the chopping block.
The market recovery was nearly instantaneous. I have always advised clients to watch what the government and the Federal Reserve SAY, not what they DO. This was a classic case in point. The gyrations also highlighted the difficulty in timing the markets, as well as the fact that an investor’s TIME IN the market is more important than TIMING the market.
What about all the other ‘unprecedented’ actions?
The administration appears to have been making records with other actions similarly labeled as unprecedented. Both The New York Times and The Wall Street Journal have highlighted recent Trump actions — and whether they truly were unprecedented.
I won’t go through the entire list, but they scored 22 instances using the categories below:
‘No Clear Precedent’ measured 6 instances (meaning there is no comparable historical example). I would note that this category was splitting hairs. For instance, it stated that it was unprecedented that Trump signed over 100 executive orders in the first 100 days, while noting that FDR only signed 99.
‘No Precedent in the Modern Era’ measured 5 instances (meaning the actions have happened directly before, but prior to World War II). An example of this was “wanted to acquire another nation’s sovereign land” but then pointed out that this was “very common in early US history” while also stating that as recently as 1946 Truman tried to buy Greenland from Denmark.
The United States grew through the Louisiana Purchase, annexation of Texas, expansion southwest and to California, purchased the USVI from Denmark, and there were several attempts to buy Cuba. On the topic of tariffs, the NYT noted that Trump 1.0, Biden, Nixon, and Hoover significantly raised tariffs on thousands of imports.
‘Has Happened Before but Under Different Circumstances’ or is ‘Not Uncommon’ measured 11 instances (meaning from prior presidents). Examples they cited were withdrawing from international organisations or pacts, renaming mountains or features of the USA, promoting brands from the White House, etc. All were done by recent presidents, as well as in years past.
So, if not presidential actions, what is different this time?
What has been unprecedented is not the actions occurring under Trump 2.0, but the way they are being announced, rolled out, implemented, challenged in courts, paused, withdrawn, amended or abandoned — sometimes in the matter of a few days or weeks. Also unprecedented is the volatility these actions have had on stock and bond valuations, the value of the US dollar in relation to many other major currencies, and the entire level of interest rates on US government debt.
Perhaps the biggest overall effect on insurance investment portfolios has been the increase in interest rates. Remember, when interest rates increase, the value of fixed income decreases, so while the 12 basis point increase in the 3-month Bill may not have much of an effect, the 15bps increase in the 5-year and the 32bps increase in the 10-year rate has a more dramatic effect. That small change in yield represents about a 3 per cent decline in value of the 10-year Treasury.
Where do we go from here?
As I have said before, expect volatility and uncertainty to drive market movements. A president can move markets both up and down. In periods of uncertainty it is prudent to review your portfolios, check that fixed income maturities are aligned (wherever possible) with pending known liabilities, and review your IPS to determine if you are over-weighted in any particular market areas that could be adversely affected by tariffs.
While both inflation and recessions can be caused by high tariffs, it is not our expectation for either to occur in 2025 or 2026. We do expect the Fed to cut rates starting later this year, and undoubtedly this will help raise the value of fixed income portfolios. It will however cut money market rates, so I remain convinced — as I have since the summer of 2023 — that extending duration (maturities) out to 3-5 years makes sense for insurance companies that can hold such securities.
As for equity volatility, this can be best managed with a portfolio that focuses less on market capitalisation, but more on sector or style. There will be winners and losers in a trade war, and some companies are either better prepared to survive and thrive; while others will find even the most punishing tariffs have little effect on their revenues and earnings.
As the US GDP is 14 per cent imports, there will be effects, but they are unlikely to be of the size and scope that is being hyped in the media. As always, a long-term time horizon found in most insurance portfolios is key, as the focus is on long-term performance over short-term volatility.
This article was written by Jack Meskunas a Financial Advisor with Oppenheimer & Co. Inc. who can be reached at (203)975-2084 or jack.meskunas@opco.com. This article is not and is under no circumstances to be construed as an offer to sell or buy any securities. The information set forth herein has been derived from sources believed to be reliable and does not purport to be a complete analysis of market segments discussed. Opinions expressed herein are subject to change without notice and do not necessarily reflect those of the Firm. Additional information is available upon request. Oppenheimer & Co. Inc., nor any of its employees or affiliates, does not provide legal or tax advice.
