The world economies are intertwined, whether we like it or not – or tariff madness

Chart 1:  S&P500 Index, Source Bloomberg LP, used with permission

More recently the US Government started a war with Iran and Lebanon. Once again, this government action caused an 8% sell-off in the S&P500 in the month of March 2026. Conversely, policy changes, such as “pausing” the reciprocal tariffs, and ceasefires in the war, brought about substantial rallies in share prices. The tariff pause in 2025 resulted in a 20% rally in the next 21 trading days; and the announcement of de-escalation and a pending ceasefire “MOU” signed between Iran and the USA resulted in a massive 20% rally over the next two months.

It is important to understand why these kinds of government actions have such dramatic effects on both global equities and economies. This is of critical importance for captive owners and managers to understand, because increased volatility during these times can have powerful effects on portfolio valuations, and in some cases liquidity.

Bond values were also affected

If you look at Chart 2, you can see that the 10-year UST yield jumps over 12% (from 3.99% to 4.5%) in the days following “Liberation Day” as well. An increase in interest rates is synonymous with a decline in value (price) of fixed income holdings. Once again, the bonds of targeted companies and industries fell by an even greater amount.

Chart 2.  Changes in the interest rate on the 10yr UST.  Source:  Bloomberg LP, used with permission 

Captive owners and their financial professionals need to pay close attention to investments in those industries specifically “targeted” by tariffs. While I used benchmark volatility to show the effects of tariffs, individual industries and companies in many cases were even more adversely affected, meaning captives invested in the stocks or bonds of targeting industries suffered – or could suffer – heightened volatility and reduced values of those investments. A lack of complete understanding of how tariffs are affecting their captive’s portfolio could spell potential trouble should a rapid liquidation be needed to pay an urgent claim or bills.

International trade

For as long as there has been any substantial international business – which is for about 100 years – countries have debated the advantages, disadvantage, risks and opportunities of sourcing goods and selling products globally. This has also encompassed a balancing act of providing goods at the lowest possible prices in the markets where they are sold versus protecting “local” manufacturers that might find themselves at a relative disadvantage because foreign competitors have lower input costs, lower wages or government support not available to themselves domestically.

Solving for the sourcing, manufacturing and distribution of goods and services amounts to making a series of decisions covering multiple data points. A company making cars – for example – can choose to manufacture in the US, offshore or nearshore (Canada and Mexico). However, there are more decisions to be made. Cars are made of thousands of parts. Those can be made in the local market or imported.  Each decision effects the ultimate cost of manufacturing an automobile, as well as the logistics needed to get the parts and sub-assemblies in the right place at the right time. Tariffs change all the maths – and usually quite drastically. In the case of our hypothetical auto manufacturer, they can’t change sources of parts and manufacturing facilities as easily as a president’s signature can be written with a Sharpie on an executive order.   

Tariffs are taxes, period

Tariffs are taxes on imported goods. The importer typically pays the tariffs on the arrival of the importation, and bills the purchaser. In most circumstances (and in the case of high-tariff items in all circumstances) these are passed on as price increases to the ultimate purchaser. There are few, if any, businesses with the financial wherewithal to absorb (some call it “eat”) tariffs, so they are added to the prices of the goods.  

In the fiscal year through 30 June 2026, US companies and citizens have paid more than $163 bn in tariff taxes. That is a huge tax increase. In that sense, President Trump is very different from prior republican presidents who seemingly did anything they could to avoid raising taxes.

Changing buyer behaviour

If the tariff on an item is high enough, no one will import that item, and it will become unavailable for sale in the USA. A perfect example of this are the 100% tariffs on Chinese automobiles. It makes them so expensive that no one would buy them in the US – thusly they are not imported. If you put a high enough tax (tariff) on an item, the market for that item will shrink, or disappear.  

More important in some ways than the tax burden, and reduction in choices for consumers, are the costs of business disruption caused by the uncertainty of the amount and timing of tariffs. Add to that the on-again-off-again implementation of tariffs, the changes in tariff rates and the courts in the US striking down the legality of tariffs (as applied) and you can imagine more than a few C-Suite executives finding themselves feeling “insane” from the tariff madness!

I have been asked many times how we can still have tariffs when the Supreme Court struck them down as “illegal”. That was the “emergency tariffs” and in a game of legal whack-a-mole, as each tariff is declared illegal, they are cancelled – only to be replaced later that day with the same (or higher) tariffs issued under a different statute. The Wall Street Journal recently wrote a great primer on the sections of law under which tariffs can be levied – and for what reasons. It summarised, with some thought-provoking comments, how strong the US economy would be without the tariffs and the uncertainty they are causing businesses.  

I would add this thought: Imagine how many more captives would be invested in US (and global) stocks and bonds – and reaping the tremendous returns we have seen the past couple of years if they weren’t watching the stomach-churning volatility caused by tariff madness? 

Ninety years after Reefer Madness, the current administration has declared that marijuana is safe and harmless. It’s said the same thing about tariffs. I believe it is wrong on both counts. 

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.  

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