The first weeks of the Trump administration have been eventful, bringing policy shifts and economic debates. While change creates uncertainty, history shows markets adapt. Each new administration enacts changes that may seem drastic in the short term but rarely derail long-term wealth generation. The current scenario involves the threat of tariffs and the impacts of DOGE; while navigating an increasingly complex geopolitical landscape and persistent inflation.

Trade wars are once again making a return. The latest in a very fluid situation is this: Tariffs on China initially levied at 10% in early February, have been doubled to 20%, while 25% tariffs have been placed on imports from both Mexico and Canada. Each country has retaliated in its own way, with further measures likely to follow. If these tariffs remain in place, they will either crimp corporate margins or be passed on to consumers through higher prices, exacerbating inflation.

From a capital markets perspective, the main questions to ask are: 1. Will these tariffs remain in place long-term? and 2. If so, will they lead to a big increase in inflation?

While we don’t know the full extent of the motivations behind these tariffs, it is important to recall that President Trump previously used tariffs as a bargaining chip in negotiations with trade partners. For instance, in 2018 he threatened up to 25% tariffs on $370B of Chinese goods – only to later agree to reduce tariffs on $120B of those goods to 7.5% in exchange for improved intellectual property protections for U.S. companies operating in China and commitments from the Chinese government to purchase $200B of U.S. goods and services. While there is no guarantee that the current proposed tariffs will similarly be negotiated, we do see some evidence of this occurring already with some concessions being offered.

Assuming these tariffs are here to stay, it’s helpful to look back to when President Trump implemented tariffs in 2018. During that period, core inflation remained at 2.0%, in line with historical averages. Ultimately, companies adapted quickly, evidenced by the U.S. Census Bureau data showing a 17% drop in imports from China the following year.

At the same time, the administration has introduced the Department of Government Efficiency (DOGE), led by Elon Musk, to streamline federal operations through technology and private-sector strategies. While the stated goal is to massively reduce government spending and positively impact the deficit, there are substantial concerns surrounding job losses and disruptions to essential government services.

Despite many headlines over the past several months, it remains to be seen what the actual long-term impact of this initiative will be. According to DOGE’s math, to date they have made $105B in cuts, with savings to be realized over multiple years. Further analysis suggests that the actual savings may only be a fraction of this figure.

Similar initiatives have been attempted before. In the 1990s, under the Clinton administration, there was a “Reinventing Government” initiative with similar objectives to DOGE. This initiative saw the federal civilian workforce reduced by 19%, closures of 1,100 government field offices, and the introduction of technology reduced some agency processing costs by 30%. These efforts, among others, eventually contributed to the last balanced budget the country has seen.

There has been no shortage of headlines surrounding the Musk task force, identifying legitimate concerns and potential reasons for optimism. At this point, it is too early to determine what impact DOGE may have on our government, deficit, and economy.

When you combine the tariff news, the DOGE headlines, and all of the geopolitical changes of late, the forward outlook can seem tenuous. But remember, administration changes historically bring a flurry of adjustments that create uncertainty at the outset. What are the top agenda items? What tools will the administration utilize to push forward these items? While we cannot predict the next headline, we do know that market anxiety surrounding new administrations is nothing new. History has shown us that staying the course is the best action for long-term investors.

Consider this: the S&P 500, including dividends, returned 16.3% annually under Obama, 13.4% under Biden, and 16.0% under Trump’s first term—despite a 19% selloff in 2018 and a 34% drop during COVID-19. Further, for all of the headlines of change and uncertainty that we have already been through, the S&P 500 total return is down only slightly year-to-date and is only 6% off of its all-time highs.

At Sandhill, our approach remains unchanged: invest for the long term in high-quality, well-capitalized companies with strong secular growth trends. If we see the landscape structurally changing, we will act. We reduced our exposure to the life sciences industry earlier this year given its reliance on funding from the NIH as well as the possibility of retaliatory measures from China. But just as importantly, we will also use this volatility to our advantage, and we are actively looking for quality businesses to add to your portfolios at opportune moments.

The best opportunities arise from the depths of uncertainty.

Best Regards,
The Sandhill Research Team

Disclaimer: This commentary is for informational purposes only and does not provide specific investment advice, recommendations, or offers to buy or sell any securities. Sandhill Investment Management (“Sandhill”) is a registered investment adviser with the SEC. Statements reflect Sandhill’s views as of the commentary date and are subject to change. Forward-looking statements are speculative and not guarantees of future performance. References to specific securities, industries, or economic policies are for illustrative purposes only and do not constitute recommendations or assurances of results. Hypothetical scenarios, such as historical S&P 500 performance under different political administrations, are based on past data and do not predict future returns. Economic and market discussions are based on publicly available information believed to be reliable, but Sandhill does not guarantee its accuracy or completeness.  All investments involve risks, including market volatility, geopolitical uncertainty, and company-specific factors that may impact returns. Past performance is not indicative of future results. For additional disclosures or information on Sandhill’s investment strategies, please contact Sandhill Investment Management at 716-852-0279.