Tariffs, taxes and market tumult: Navigating uncertain, volatile times

Investors' bullish expectations about President Donald Trump's second term look a bit quaint — at least for now — as tariffs, tax questions and inflation fears pervade the economy.

The Fed's decision after its March meeting to keep the same interest rates but maintain the central bank's plans for two cuts later this year temporarily tamped down the stock volatility shaking markets this month. But economic fears are rippling from the impact of Trump's stop-and-start tariff announcements, the ongoing job cuts at federal agencies through Elon Musk's Department of Government Efficiency (DOGE) and the administration's outright warnings about looming periods of "transition" or "disruption."

For many financial advisors, though, the stock volatility and policy uncertainties represent a recurring cycle. Regardless of politics or any particular day's results on Wall Street, advisors and other experts point to the need for coaching that keeps clients focused on the long term while tapping into some opportunities as they confront the risk of macroeconomic trends and unknown tax rules for next year that are not under their control. Investor biases toward, for example, recency and herding could do far greater damage to clients' portfolios than any stock downturn or political pressures.

"We're proactively communicating with clients, reminding them of the value of a diversified portfolio and keeping them in their seats," said Jon Adams, the chief investment officer of Naperville, Illinois-based Calamos Wealth Management. Clients' economic anxieties were "a key topic of discussion" in the firm's monthly call for advisors, he noted. "We've had a great couple of years, as far as equity markets are concerned, but it is a good reminder that there is volatility from time to time."

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Potential volatility hedging strategies

Part of the coaching revolves around reminding clients that many of them have already hedged against stocks through a "market neutral strategy" with holdings in convertible bonds, private credit investments that are senior secured debt at the top of the capital structure in "very thoughtful" asset allocations and public or corporate fixed-income securities, Adams noted. For example, bonds that finance airports, toll roads, cellphone towers, data warehouses or manufacturing plants are "high-growth types of areas that are going to be very attractive over the medium and long term," he said.

Much of advisors' counsel during this time of volatility stems from the clients' retirement timelines, risk appetites and asset levels, according to Jacqueline "JaQ" Campbell, founder of Southfield, Michigan-based Alexander Legacy Private Wealth. Then they can decide on strategies such as whether to pursue "investments that have more capital preservation as a main goal" or "explore doubling down on our growth right now," she said.

"It's really about reminding clients that, at some point, this, too, shall pass. What we do right now is we stay laser-focused on our goal," Campbell said, noting that could mean embracing the so-called dollar cost averaging method for some clients. "When the market's down, we're getting more shares, and we're able to leverage that as a hedging strategy."

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Key potential impact areas

In a special update for the firm's clients earlier this month about potential tariffs on Mexico and Canada, Adams called attention to the possible ramifications to the prices of imported luxury items, cross-border real estate, business supply chains, geographic distribution of asset holdings and taxes on international investments or income sources.

"Additional tariff strategies are reportedly in development, with plans for a country-specific approach based on factors like existing foreign tariffs and trade barriers," Adams wrote. "These policies, expected by April 1, may reflect a stronger commitment to tariff implementation than previously anticipated by analysts who viewed earlier discussions as negotiation tactics. A key consideration is whether these measures might trigger renewed inflation pressures, which remain a concern for the Federal Reserve and could affect interest rate-sensitive holdings. Our investment stance maintains neutrality between stocks and bonds, while continuing to favor U.S. equities partly due to these evolving trade dynamics. We recommend a proactive review of international exposure and supply chain dependencies in both personal and business portfolios."

In that murky landscape, few stocks are getting as much attention as that of one of the largest car companies in the world, the Musk-founded Tesla Motors. The value of the company's shares has tumbled more than 50% from their record high in mid-December. Amid a political outcry against the firm based on Musk's actions with DOGE and the massive financial support for Trump from the world's richest person, some are calling the company into question.

Multiple advisors who are clients of Mike Byrnes, founder of wealth management growth consulting firm Byrnes Consulting, have told him that Tesla "seems to be the No. 1 most controversial investment" right now, since many of the customers' portfolios have lost value during the stock's slide in recent weeks, Byrnes noted.

"Some clients don't want a part of it, even though it might be good for their long-term future, because of their political bent. So the advisors have a challenge to be neutral, even though they might not be neutral, and help the clients realize what's best for them, even though they might not be able to see it," Byrnes said. "Now they see him with DOGE cutting back some programs that they might have liked, and so they're trying to get back at him and the current administration by selling a stock that might be good for them in the long run. They might be shooting themselves in the foot just to get their political point across."

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Taxes and the long term

Taxes are adding another layer to behavioral and economic factors shaping advice to clients this year. While most expect President Trump and his Republican allies in control of Congress to extend the expiring provisions of the Tax Cuts and Jobs Act, no one can say for sure when they will do so and whether they will make any changes to those parts of the law or other aspects of federal tax rules. 

In that vacuum of answers, advisors and clients may consider steps that they can take in the interim, like moving high- or low-basis stocks out of their estates and into trusts or taking advantage of "a good opportunity to harvest losses in an effective and optimized way" during a slump for equities, Adams said.

"Our base case is that a lot of the Tax Cuts and Jobs Act gets extended by the end of this year," he said. "A lot of clients are looking at donor advised funds to reduce their tax burden in the immediate year, but also maintaining flexibility for those charitable contributions in future years."

With a lot of unpredictability in a time of volatility, advisors can simply show their worth to clients by reassuring them that "you've got a great pilot" for getting through it, Campbell said. As an advisor who is "always optimistic for capital markets" but "also a realist," she said she could recall at least a half dozen periods of downturns or recessions over her decades in the industry.

"As I'm helping clients navigate through these market conditions, I do lean on my 32 years of experience," she said. "We don't want to time the market, we have time in the market — that's the key. The person who pulls out always ends up missing the bounceback."