Stating the obvious, equity markets are roiled by frequently changing “tariff” headlines. The Economic Policy Uncertainty Index has spiked to its highest levels since global governments shut down the economy during the COVID-19 pandemic.
That uncertainty has pushed the S&P 500 into correction territory with a 10 percent decline, triggering news headlines about a possible recession. Further instigating investors’ concerns is that members of the White House have not ruled out economic pain. I may be naïve in trying to predict fiscal policy in this uncertain world, but it appears the White House is starting to walk back statements like there will be “pain ahead,” which previously suggested they would accept a recession as they levy tariffs.
It would be particularly helpful to know whether investors have sufficiently deleveraged so that equity markets are near a sustained bottom. Investor sentiment is terrible, and that is a bullish signal for a contrarian investor like me. However, erratic policymaking can add to those extremes by making pessimistic investors even more fearful, so I do not rule out further downside. From 1950 to 2024, the average intra-year market drop was 13.6 percent (the average annual return was 11.6 percent). My best guess is that stock will bottom out in mid-2025, down between 16 percent and 20 percent.
Why do I think the S&P’s downside limit is “only” 20 percent? In two words, “no recession.” The odds of a recession have doubled since the beginning of the year and are now roughly one in three. That is high, which is why I am considering making some tactical defensive moves. However, my baseline prediction is that the U.S. will avoid a recession. With no recession, I think the S&P floor is about 5,200 points, which is the August 2024 low. That is about a 16 percent decline. If that level is violated, the next resistance level is about 5,000 points, which is the April 2024 low, which is close to a 20 percent drawdown.
Per the table below, a 20 percent decline in the S&P 500 occurs about once every four years.
The market dropped at least 20 percent in 2022 and 2020. In 2018, it fell 19 percent and change. Before those instances, the S&P 500 had not dropped 20 percent since the Financial Crisis—a nine- year gap.
For many people, the stock market decline has felt like it will never end, despite its fast-paced nature. The market fell 10 percent in 20 calendar days in 2025, the fifth-fastest decline in the past 75 years. Stocks have likely overreacted to the downside in the short term. A reflex rally seems appropriate, even if not telling.
There have been six times since 1950 that the market has dropped 10 percent in 20 calendar days or less. According to FundStrat, those instances were:
- The COVID-19 crash in February 2020 dropped the S&P 500 10 percent in 8 days.
- The trade war under Trump in 2018 took 13 days.
- The Asian Financial Crisis crash of 1998 took 20 days.
- Fed Chair Volcker shocking the economy with interest rates sparked a 20-day correction in 1979.
- President Eisenhower’s heart attack in 1955 triggered an 18-day sell-off.
- The Korean War triggered a decline in 1950 that lasted 17 days.
Five of those six times, the market was higher one month later (the exception being the COVID-19 crash). The market was higher all six times, three, six, and 12 months later, with median gains of nine percent, 15 percent, and 21 percent, respectively.
Correcting the top 10 tax myths
One of my favorite podcasts is Stephen Dubner’s “Freakonomics.” I listen to a dozen or so podcasts per week, and my favorite episode of the week was one featuring Jessica Riedl, who was recently named by Washingtonian magazine as one of the most influential economic policy professionals in Washington, D.C. Although she is admittedly right-leaning, she is known for taking swipes at Republican administrations under Donald Trump and George W. Bush. She co-authored a pair of opinion pieces in the Boston Globe; one was “What Liberals Get Wrong About Taxes,” and the other was “What Conservatives Get Wrong About Taxes.”
Riedl also wrote a report called “Correcting the Top 10 Tax Myths.” These myths, drawn from a range of common conservative and progressive arguments, reflect misunderstandings about how the federal tax system actually collects revenue and affects economic behavior. Below is a summary of those 23 pages.
- Myth: “Tax Cuts Pay for Themselves”
Correction: While tax cuts can boost economic activity and generate some additional revenue, they rarely recoup the full cost. Research suggests that most tax cuts do not fully offset their initial revenue losses. - Myth: “Tax Cuts Will Starve the Beast”
Correction: This theory proposes that cutting taxes forces the government to reduce spending. In practice, Congress often continues or even increases spending after large tax cuts, leading to higher deficits rather than reductions in expenditures. - Myth: “The Middle Class Pays Higher Tax Rates than the Rich”
Correction: Federal data show that the U.S. tax system is progressive overall. Higher earners typically pay a larger share of their income in taxes, and lower- or middle-income earners tend to pay smaller effective rates, even negative rates in some cases. - Myth: “Those Old 91 percent Tax Rates Raised Large Tax Revenues”
Correction: Despite having a top marginal rate exceeding 90 percent in the 1950s, income-tax revenues did not soar. A small fraction of taxpayers were actually subject to those very high brackets, and total tax receipts as a share of the economy remained lower than they are under current lower top rates. - Myth: “Europe’s Higher Tax Revenues Derive from Aggressively Taxing the Rich”
Correction: Much of Europe’s higher revenue comes from broad-based taxes, such as value-added taxes (VAT) and payroll taxes that apply across all income levels. American rates on high earners and corporations often match or exceed those in other Organization for Economic Co-operation and Development (OECD) countries. - Myth: “‘Tax Cuts for the Rich’ Drive Soaring Budget Deficits”
Correction: Long-term deficits mainly reflect higher spending levels and demographic pressures rather than just tax cuts. Since 2000, increases in federal outlays and the end of an unusually high revenue bubble have played a more significant role in deficits than tax cuts aimed at top earners alone. - Myth: “Taxing Millionaires and Corporations Can Eliminate the Deficit”
Correction: Given the size of projected federal spending, even significant rate hikes on corporations and high-income households would not generate enough revenue to close the large structural deficits. - Myth: “Most of the benefit of the 2017 Tax Cuts and Jobs Act Went to Corporations and the Wealthy”
Correction: Estimates show that roughly 70 percent of the law’s benefits went to middle- and lower-income taxpayers. Corporate rate reductions were primarily offset by other corporate and international tax changes, meaning the bulk of the net cost came from individual tax cuts that reached a broad range of earners. - Myth: “Repealing All Post-1980 Tax Cuts Provides Painless Deficit Reduction”
Correction: Fully rolling back these tax cuts from the last forty years would sharply increase taxes not only on top earners but also on middle- and lower-income families, undermining the notion that only the wealthy benefited from those reforms. - Myth: “America’s Corporate Taxes Are Far Below International Standards”
Correction: After the 2017 changes, the combined federal and state statutory corporate tax rate is near or slightly above the OECD average. Corporate taxes in many European nations and in Nordic countries are often lower.
Notably, Riedl finishes the podcast by saying:
One of the things about the debate right now on taxes and spending and deficits is, it’s all driven by partisan tribalism. The people who cheer my criticisms of one party’s president will get angry when I apply the same standard to their party’s president. Ultimately, I have faith that the math eventually wins. The laws of economics always win.
Dubner narrates in the post-interview:
I take her last point as a challenge to all of us: to apply the same standards to the politicians you support as the ones you don’t. It is probably unrealistic to suggest this, maybe even idiotic, but if every one of us were to start thinking that way and acting that way, we might start pushing back against the political absurdities that have gotten us locked into this situation. I’m probably wrong; it’s unlikely to happen, but I’d rather start rowing in the right direction, even against the tide, than to keep drifting further out to sea.
A brief on tariffs
There are myths, and then there is just plain being wrong. Two people I met this week were just plain wrong. A Republican told me that they liked tariffs because, and I paraphrase, “it’s about time foreigners paid their fair share.” A Democrat complained about Trump killing the economy in particular because, again, I paraphrase, “of sky-high tariffs that no other reasonable president would consider.” Emphasis on “reasonable”; I will get to that in a moment.
Who pays the tariffs?
Foreigners do not directly pay for tariffs imposed by the United States—the companies that bring the foreign goods into the U.S. pay the tax to the U.S. Treasury. Now, you can have an opinion on whether tariffs are good or bad, but it is essential to know who pays the tax to have that opinion. Also, per my reporting on a LinkedIn post, U.S. businesses intend to pass their tariff costs onto consumers.
The intent of tariffs, among other things, is to protect U.S.-based companies by raising the price of imports. Suppose you are the purchasing manager of Acme Inc. on Main Street, U.S. If the cost of your Canadian steel just jumped by 25 percent because of a tariff, you might buy your metal from U.S. Steel instead, thus helping a U.S. company.
Are tariff threats typical?
Whether threatening high tariffs is unreasonable is an opinion; I am here to drop knowledge, not opinions. And the fact is that threatening high tariffs is more typical than you might expect. I found so many examples that I decided to limit the threats to 100 percent tariffs (for comparison, many of President Trump’s proposed tariffs are 25 percent) over the last half century. (Dear reader: You might want to skip right to the last paragraph of this column. The specifics of the tariff threats are only important to the extent they solidify the fact that “unreasonable” tariff threats are typical.)
1970s: During various trade tensions in the 1970s (including disputes over steel, textiles, and agricultural products), U.S. officials floated threats of “prohibitive” tariffs, sometimes applying a 100 percent tariff.
1980s: As trade frictions intensified over Japan’s surging exports, U.S. officials threatened tariffs that could effectively block certain Japanese products. Those tariffs were threatened to reach 100 percent on a few occasions. Although such rates were never implemented across all Japanese imports, targeted threats (especially on electronics and vehicles) drew media coverage.
The U.S. repeatedly threatened retaliatory duties in response to Europe’s restrictions on hormone-treated beef and other U.S. agricultural products. While negotiations usually prevented an outright 100 percent tariff, these trade disputes established a pattern in which Washington would threaten duties at or near 100 percent on certain European goods to gain leverage.
1990s: The dispute over hormone-treated beef was one of the more protracted trade conflicts between the U.S. and the European Union (EU). After the EU refused to lift its ban, the U.S. imposed—or threatened to impose—100 percent tariffs on selected EU imports (including certain cheeses, chocolates, and other specialty items).
A complicated dispute involving EU banana-import regimes led the U.S. (along with other countries) to threaten 100 percent tariffs on a wide array of European luxury goods—handbags, bath products, and more. In practice, tariff levels varied, but the headline 100 percent rate was invoked to signal the severity of U.S. retaliation if Europe refused to comply with World Trade Organization (WTO) rulings.
2000s: The George W. Bush administration imposed temporary steel tariffs up to 30 percent (not 100 percent) on numerous foreign steel products. In response, the EU drew up a list of U.S. goods on which it would impose retaliatory tariffs—some potentially as high as 100 percent—if the U.S. did not remove the steel tariffs. Although the dispute was significant, the EU’s threat never became a 100 percent blanket tariff on everything; it stayed targeted toward politically sensitive exports (like orange juice or motorcycles).
Intermittent threats of 100 percent duties on narrow categories (e.g., certain Chinese goods or specialized European exports) to enforce WTO rulings were made.
2010s: 100 percent tariff threats briefly circulated as the U.S. expanded investigations into digital taxes by the UK, Spain, Italy, Austria, and others. The Office of the U.S. Trade Representative (USTR) published potential lists of goods subject to possible 100 percent tariffs but later suspended or dropped them, citing ongoing global negotiations at the OECD.
The U.S. has periodically threatened 100 percent tariffs for decades. Again, opinions vary on tariffs, but given the preponderance of the word in business news headlines lately, it is useful to have some context.
Allen Harris is an owner of Berkshire Money Management in Great Barrington and Dalton, managing more than $700 million of investments. Unless specifically identified as original research or data gathering, some or all of the data cited is attributable to third-party sources. Unless stated otherwise, any mention of specific securities or investments is for illustrative purposes only. Advisor’s clients may or may not hold the securities discussed in their portfolios. Advisor makes no representations that any of the securities discussed have been or will be profitable. Full disclosures here. Direct inquiries to Allen at AHarris@BerkshireMM.com.
