CM Market & Portfolio Update - Strategic Implications of Tariffs and Trade Policy

April 5, 2025

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Just a few weeks ago, we released our Q1 2025 Market & Portfolio Update. However, given the sweeping changes announced in U.S. trade policy—namely the introduction of broad, reciprocal tariffs—we believe it is important to provide an updated perspective. These policies have immediate and far-reaching implications across inflation expectations, monetary policy, market sentiment, and investment positioning.

Evolving Macro Environment

As we move further into 2025, the global economic landscape is undergoing a major recalibration. While persistent inflation, central bank policy shifts, energy market volatility, and geopolitical uncertainty have remained key drivers, the administration’s aggressive trade actions have emerged as a central market force. These measures reflect a deliberate shift away from the status quo—a status quo that is no longer economically or strategically sustainable.

The economic policies of the past 20 years have led to severe imbalances in both the U.S. fiscal position and the global balance of trade. Multi-decade fiscal deficits have resulted in the accumulation of $37 trillion in total U.S. government debt, including $9 trillion in intra-agency obligations and $28 trillion in marketable Treasury securities. Nearly 54% of that marketable debt matures over the next three years.

The average coupon rate on U.S. debt has climbed from 2.2% in 2019 to 3.75% in 2024, pushing interest expense from 10% to 17% of federal tax receipts. With ongoing refinancing at 4–4.5% rates—alongside a projected $2 trillion annual budget deficit—interest costs would rise to 28% of government revenues in the next 3 years. This path is fiscally unsustainable and could ultimately jeopardize the government's capacity to service its debt, raising the risk of a default. The current path demands decisive policy action.

CM Note: The U.S. debt outlook has been a key focus of ours for some time. We addressed it in detail during our Q4 2023 Economic & Market Outlook as part of our broader analysis on long-term fiscal risks. Click here to view slides 11–17 on the debt crisis or click here to watch the full presentation.

Since entering the WTO, China’s state-subsidized industrial overcapacity has created significant dislocations in global trade. While it has kept inflation low for decades, it has also contributed to the erosion of U.S. manufacturing, held back middle-class wages, and created more risk for national security. The U.S. government’s new trade policies are meant to fix these long-term problems by bringing key industries back home, supporting U.S. production, and improving national security.

These tariffs are not just about protectionism, they are a strategic response to a broken global trade system. For decades, the U.S. opened its markets based on the ideal of free trade, assuming other nations would do the same. But in reality, many countries used unfair trade practices—such as subsidies and currency manipulation—to protect their own industries. The U.S. was often the only player following the rules. Now, the goal is to rebalance that system and restore fairness.

Markets have reacted quickly. While major stock indexes did well earlier in the year, the average S&P 500 stock has dropped more than 15% from its peak. Losses have been even larger in tech-heavy indexes like NASDAQ and in companies that do a lot of business overseas. As a result, market volatility has gone up, and investors are now focusing more on companies with strong cash flow, solid balance sheets, and steady earnings.

In this kind of market, it’s especially important to stay disciplined with valuations, keep portfolios diversified, and maintain a long-term outlook.

Strategic Shift: Tariffs as an Economic Reset

The recently announced “reciprocal tariffs” are more than just a small change in trade policy—they mark the start of a major shift in how the U.S. handles its economy. This move is being described as a reset, meant to deal with several big challenges at once:

Refinancing $9.2 trillion in government debt coming due in 2025,
Dealing with ongoing inflation,
And responding to changes in global politics.

These tariffs are not one-off actions—they are part of a larger plan to refocus the U.S. economy and strengthen the country’s position in the world. Tariffs are being used as a deliberate tool to rebuild strategic industries. These include critical sectors like semiconductors, pharmaceuticals, strategic metals, autos, and clean energy. A nation without strong domestic production in these areas becomes economically vulnerable—and strategically exposed.

Critics argue that tariffs raise prices. While that’s true to a degree, most consumer prices are driven by many factors beyond tariffs—including labor, logistics, and corporate pricing strategies. Some short-term inflation may be a worthwhile trade-off if it leads to stronger long-term independence and supply chain security. Further, not all cost of tariffs we be absorbed by the U.S consumer. Foreign companies will have to decide whether it’s better to lose sales to the world’s largest consumers or lower prices to offset the tariffs.

Debt Management and Treasury Dynamics

The U.S. government’s debt situation is reaching a critical juncture. Over the next five years, 68% of total government debt will need to be refinanced. Of the $37 trillion in total U.S. government debt, $28 trillion is in marketable Treasury securities, and nearly 54% of that marketable debt matures over the next three years. At the same time, the government is expected to borrow an additional $13 trillion to cover future budget deficits and rising interest costs.

This presents a major challenge. The average coupon rate on U.S. debt has already risen from 2.2% in 2019 to 3.75% in 2024. As older, low-cost debt matures and is replaced with new debt issued at current market rates—typically between 4% and 4.5%—interest payments are escalating rapidly. In just five years, interest expense has grown from 10% to 17% of all federal tax receipts. If the current trajectory continues, interest payments could consume as much as 28% of federal revenues by 2028.

That means more than a quarter of every tax dollar could go just to servicing the national debt—leaving far less room for essential spending on healthcare, defense, infrastructure, and education. It also raises the long-term risk of a fiscal crisis if market confidence falters or rates spike further.

This is why one of the administration’s key goals is to lower Treasury yields—to reduce the cost of borrowing and ease the pressure of refinancing nearly $9.2 trillion in debt coming due in 2025 alone. One benefit of recent tariffs and trade volatility is that they’ve created a "risk-off" environment in global markets. In uncertain times, investors tend to seek the safety of U.S. Treasuries, which increases demand and puts downward pressure on yields.

If interest rates fall meaningfully from current levels, the Treasury could take advantage of the situation to extend the average maturity of its debt portfolio—locking in lower rates for longer and reducing the need for frequent refinancing in a higher-rate environment.

Still, none of this is guaranteed. The government will need to act with urgency—cutting wasteful spending, curbing the $2 trillion annual deficit, and stabilizing long-term borrowing costs. Federal interest costs are now projected to reach $952 billion in 2025, more than double what they were just five years ago, and one of the fastest-growing areas of federal spending. Small moves in rates—just 0.5% to 1%—can result in tens of billions in interest savings annually. These savings could help protect the economy and provide critical flexibility as the U.S. navigates global uncertainty and structural imbalances.

In FY2023, the federal deficit rose to $1.7 trillion and is expected to increase to $1.9 trillion in 2025. Total government spending is projected to reach $7.0 trillion this year, continuing a trend where expenditures far exceed revenues. This widening gap reflects structural imbalances—where government spending continues to significantly outpace revenues—and highlights the growing fiscal pressure on both policymakers and markets.

Deficit Reduction Push

Elon Musk and the Department of Government Efficiency (DOGE) are leading a major effort to reduce the federal deficit by $1 trillion. Right now, the government is saving about $1.89 billion each day, which has already added up to around $140 billion in savings. If this pace continues, the $1 trillion goal could be reached by July 2026. The plan focuses on cutting waste, improving how government agencies work, and using technology to create long-term savings.

Reviving American Industry

The tariffs are meant to help restart U.S. manufacturing by making imported goods more expensive. This encourages companies to move production back to the United States. But in reality, American factories and supply chains can’t grow overnight. One big challenge is finding enough skilled workers, especially for advanced manufacturing jobs. Over time, more investment in automation and robotics is expected to help fill this gap by improving efficiency and lowering labor costs.

In the short term, this shift will likely lead to higher prices for consumers as U.S. factories work to meet demand. The administration is making a careful bet that these short-term challenges will lead to a stronger, more self-reliant manufacturing system by 2026—and a healthier economy in the long run.

Already, we’re seeing a powerful response. Over $5 trillion in new U.S. manufacturing investments have been announced. Examples include:

Apple is investing over $500 billion, including a new plant in Houston.
TSMC is spending $100 billion on five chip factories in Arizona.
Eli Lilly is committing $27 billion to pharmaceutical manufacturing.
Hyundai is building a $20 billion steel plant in Louisiana.

These projects reflect growing momentum behind reshoring and the revival of American industry. If $5 trillion in U.S. manufacturing investment is realized over the next five years, it could contribute up to $2.5 trillion per year to GDP—totaling $12.5 trillion. This level of activity could also generate an estimated $450 billion annually in tax revenue and support as many as 4 million jobs each year across factories, supply chains, and related services. While outcomes will vary, the potential economic impact of this industrial shift is significant—and could shape the nation’s growth and resilience for decades to come.

Targeting China

China has received the highest tariff—a steep 54%—showing that it is the main focus of this trade strategy. The goal is to put strong economic pressure on China and encourage its government to let the value of its currency, the yuan, rise. U.S. officials believe China has kept its currency low on purpose for many years. This makes Chinese goods cheaper around the world, giving them an unfair advantage in global trade. By placing such a high tariff on China, the U.S. is making it clear that it wants to rebalance trade and change how global economics are working.

Short-Term Offsets and Global Reactions

To help reduce the short-term impact of rising prices on consumers, the administration is thinking about offering targeted tax breaks to households. Another option being considered is lowering the value of the U.S. dollar to make American exports more competitive around the world. However, the U.S. dollar is currently strong, which may naturally help absorb some of the impact from higher import prices.

The global response to the new U.S. tariffs has been fast. The size and speed of the changes have created uncertainty, but they are also starting to shift global trade patterns. Smaller countries that depend on exports are feeling the pressure and could fall into recession. Because of this, some—like Vietnam—have already started direct trade talks with the U.S. While we don’t know exactly when or how these talks will move forward, the risk of a global slowdown makes them more likely to happen soon.

Navigating Risk, Positioning for Opportunity

This policy shift brings both opportunity and risk. If domestic factories can’t ramp up fast enough, or if other countries respond with their own tariffs that further raise inflation, the Federal Reserve may be forced to raise interest rates again. That would go against the administration’s goal of keeping rates low and could tighten financial conditions at the wrong time.

That’s why, in this market, leadership is shifting. Investors are moving away from high-growth, speculative stocks and toward companies with strong fundamentals, those with pricing power, cost control, and steady demand. The current environment favors U.S.-focused companies that can manage through supply chain changes and margin pressures.

We continue to believe that valuation discipline matters, especially as higher interest rates reduce asset prices. That’s why we focus on high-quality, cash-generating businesses purchased at reasonable prices and with a margin of safety. This helps protect client capital and supports long-term returns.

In balanced portfolios, fixed income also plays an important role. We currently favor a strategy of U.S. Treasuries and high-quality corporate bonds with maturities in the one-to-five-year range. This approach is designed to help preserve capital, generate income, and maintain flexibility as interest rates evolve.

While short-term disruptions from tariffs and inflation are real, history shows that value-focused, patient investors are often rewarded. Market volatility can create attractive opportunities to invest in strong businesses at more favorable prices. For holdings that have temporarily declined—but were purchased with sound valuation and strong fundamentals—we remain confident in their long-term potential.

Overarching Ambitions

The administration’s broader goals are clear:

Lower Treasury yields to reduce borrowing costs and ease refinancing pressures
Cut spending and reduce the federal deficit through strategic reforms
Restore American manufacturing and reduce foreign dependency
Realign global trade to better reflect U.S. strategic and economic interests

Catalyst, Not Conclusion

These tariffs are not the end, they are just the beginning. They are designed to spark investment, encourage innovation, and shift both domestic and international trade behavior. Some critics say the U.S. should have rebuilt its industrial base before applying pressure. But the administration believes disruption is a necessary catalyst for long-overdue change.

Conclusion: A Turning Point

This is more than a short-term policy shift; it may represent a necessary realignment in how the U.S. approaches trade, debt, and industrial strategy. Rather than relying on idealized assumptions, current policies appear to reflect a more pragmatic view of global economic realities. Rebuilding a strong and resilient industrial base is not about isolationism but about creating a foundation for long-term economic stability and national well-being.

In September, Century Management celebrated its 50th anniversary. Over the past five decades, we’ve guided clients through a wide range of market, economic, and geopolitical conditions, including:

10 presidential administrations
Inflation as high as 14%
Interest rates reaching 20%
8 U.S. recessions
8 S&P 500 bear markets, averaging a 37% decline over 13 months
8 major U.S. military engagements
Many cycles of market extremes—from fear to euphoria

Throughout all of this, our philosophy has remained steady—guided by patience, discipline, and independent thinking. We make investment decisions based on facts, experience, and time-tested principles. Rather than building a portfolio to mirror an index, we focus on investing in durable, high-quality businesses in sectors we believe are positioned for long-term success. Each investment is evaluated on its own merits, using our assessment of reward-to-risk characteristics. We believe our portfolios are built to navigate uncertainty and capture long-term opportunities.

This 50-year milestone reflects more than longevity, it reflects our enduring commitment to the principles that have guided us since the beginning. While markets change, we believe that value investing, disciplined risk management, and a long-term perspective remain essential to helping clients navigate uncertainty and achieve lasting results. These core beliefs continue to shape everything we do.

As we look ahead, we draw on the wisdom of Benjamin Graham, widely regarded as the father of value investing. His words, written over half a century ago, are just as meaningful today:

“A final retrospective thought. When [I] entered Wall Street in June 1914 no one had any inkling of what the next half-century had in store. (The stock market did not even suspect that a World War was to break out in two months, and close down the New York Stock Exchange.) Now, in 1972, we find ourselves the richest and most powerful country on earth, but beset by all sorts of major problems and more apprehensive than confident of the future. Yet, if we confine our attention to American investment experience, there is some comfort to be gleaned from the last 57 years. Through all their vicissitudes and casualties, as earth-shaking as they were unforeseen, it remained true that sound investment principles produced generally sound results. We must act on the assumption that they will continue to do so.”

~Benjamin Graham, 1972

Thank you for your continued trust and confidence.

Sincerely,

Arnold Van Den Berg, Founder and CEO

Jim Brilliant, CIO, Portfolio Manager, CFA

Scott Van Den Berg, President, CFP®, ChFC®, CEPA®, AIF®

Aaron Buckholtz, Portfolio Manager, Head of Trading, CFA

Disclosures:

Century Management ("CM") is an independently registered investment adviser with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. CM is also registered as a Portfolio Manager in the Province of Ontario. A full description of our Firm’s business practices, including our Firm’s investment management services, wealth plans and advisory fees, is supplied in our Form ADV Part 2A and/or Form CRS, which are available upon request and also at www.centman.com.

Past performance is not indicative of future results. The discussions, outlook, and viewpoints featured are not intended to be investment advice and do not take into account specific client investment objectives. CM reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. It should not be assumed that the industries and sectors discussed were or will prove to be profitable, or that the investment recommendations or decisions we make in the future will be profitable. Forward-looking statements are not guaranteed.

Positions held within each individual account may not be the same from one account to the next. Individual securities may be traded at different times as well as receive different execution prices. In addition, individual accounts may be pursuing similar objectives but may have different investment restrictions. All investments involve risk and, unless otherwise stated, are not guaranteed. CM-2025-04-06