Helping Investors Withstand Current and Future Market Turmoil
Two issues – abrupt and excessive tariffs leading to a supply shock and lack of inflation hedges in retirement accounts
Abstract: Current market turmoil in the form of simultaneous declines in stock and bond prices, induced by the abrupt adoption of excessive tariffs, is likely to persist. The Administration could, and in my view should, preempt the current financial crisis by adopting a more sensible tariff policy. However, a sustained decrease in both equity and bond prices is not a rare occurrence. Similar market disruptions occurred through the stagflation of the 1970s and most recently after the pandemic. The Treasury and other financial regulators could mitigate both current and future financial crises by allowing and facilitating the use of inflation hedges in tax deferred accounts, including 401(k) plans and 529 plans.
Helping Investors Withstand Current and Future Market Turmoil
Two issues – abrupt and excessive tariffs leading to a supply shock and lack of inflation hedges in retirement accounts
Treasury Secretary Scott Bessent has a tough job. He routinely balances competing objectives. He needs to reassure investors and the public and also give accurate advice. He needs to help the President achieve his objectives while also mitigating adverse impacts of aggressive policies.
The job mostly involves putting out or containing financial fires but there are also questions of how to position the economy and the financial system for sustained prosperity.
The Trump Administration maintains the new tariffs will result in the eventual rebirth of U.S. manufacturing, new good jobs, and stronger economic growth. The immediate effect has been extensive financial turmoil.
In an April 6, 2025, interview on Meet the Press, the Treasury Secretary argued that Trump’s tariffs were necessary and that most people saving for retirement were not too badly hurt by the market downturn because they had a mixture of stocks and bonds and the losses from the stock portfolio had largely been offset by gains on the bond portfolio.
Bond yields/prices then immediately rose/plunged on cue and continuation of that price movement would lead to large declines in retirement wealth for people with relatively balanced portfolios. (The yield on the 10-year bond went from around 3.9 percent to 4.5 percent in a few days.)
The bond tantrum really spooked Wall Street and the Treasury. Some rumors suggested that it was caused by China dumping bonds. Scaramucci on his podcast stated that Bessent threatened to resign if Trump did not reverse course on tariffs. Danielle Ecuyer apparently also paid attention in the podcast.
Secretary Bessent did the right thing by urging the public and investors not to panic and all investors, especially those nearing or already in retirement, need to have a balanced portfolio. However, the Secretary overstates the ability of retirees to insulate themselves from financial turmoil by selecting a balanced portfolio with both equity and fixed-income investments.
The two most common portfolio choices used to mitigate adverse financial results during market downturns are the 60/40 equity/fixed income portfolio and life cycle funds where the share of assets invested in equity declines as investors age. These portfolios frequently fail to protect investors from market turmoil, especially when a sustained period of inflation and higher interest rates leads to depressed bond prices.
During the stagflation of the 1970s, equity and bond prices fell and moved in tandem for a sustained period of time
During the most recent actual pandemic a substantial drop in interest rates (increase in bond prices) did initially partially offset losses in equities. However, the spike in inflation and the large increase in interest rates resulted in extremely poor returns after the pandemic ended.
The current situation highlights both immediate problems stemming from the disruptive Trump tariffs and a chronic weakness of our financial system.
The tariffs are ending the era of cheap goods and lower interest rates associated with globalization.
The adverse economic impacts of tariffs will not be transitory.
Some price changes will be immediate but some reductions in overseas supply leading to even more price increases could slowly work their way through the economy.
It takes years, maybe decades, to construct new factories and increase domestic capacity. This process may be slowed by uncertainty about whether the next administration will maintain tariffs and concern that future domestic labor costs could increase largely due to rigid immigration policies reducing the supply of domestic labor.
Reasonable people can disagree about the size of the optimal tariff for the United States at this time. My view is the Trump tariff rates are way too high because, as noted by the U.S. Chamber of Commerce, the tariffs are imposing substantial cost on small businesses. Also, the United States does not have a large enough working-age population for this level of reindustrialization.
The level of the optimal tariff is a political question shaped by different views of economic justice and different views of the tradeoff between keeping prices low for the general population and protecting workers and communities from the impact of unfair often subsidized foreign competition.
The issue of how to protect retirees from turmoil in financial markets, which is likely to increase due to any economic shock including the current one, is in the purview of the Treasury Department and other financial regulators.
The current change in trade policy is highly likely to lead to sustained higher interest rates because our trade partners will no longer have large surpluses that would be invested in U.S. Treasury securities.
Moreover, China and other nations adversely impacted by the tariffs could dump U.S. Treasury securities leading to a spike in interest rates.
Secretary Bessent did the absolute correct thing by pulling the alarm bell when interest rates spiked on and after the first weekend of April 2025. A simultaneous spike in interest rates and continued decline in equity prices would have devastated portfolio balances for all retirement savers, even households with balanced portfolios.
Bond prices and equity prices are now falling and do so fairly frequently. Most 401(k) plans and 529 plans only allow investments in bond or stock funds, which underperform in periods of inflation or stagflation. The Secretary of the Treasury and other financial regulators can ameliorate the current and future financial crises by adopting financial rules and incentives, which allow and facilitate greater use of hedges against inflation and high interest rates in tax-deferred accounts.
The best hedge against inflation is a Series I Savings bond, which increases with inflation and can never fall in value. Unfortunately, IRS rules do not allow for the purchase of Series I Bonds inside tax deferred accounts.
Most retirement accounts do not even allow for the direct purchase of a Treasury Inflation Protected Security or a short-dated Treasury bill.
Treasury inflation Protected Securities, like Series I Bonds, will explicitly insulate investors from higher inflation.
Short term Treasury securities and CD ladders with exact maturity dates better insulate investors in a period of increasing rates than bond funds because all invested funds are paid back to the investor at par value.
The best way for Secretary Bessent to protect investors from any adverse market event leading to declines in equity prices and increases in interest rates is to allow, facilitate and encourage the increased use of inflation hedges inside tax deferred accounts.
The best way for the Administration to forestall the projected return of higher interest rates and inflation is to substantially reduce their new tariffs.
Authors Note: A more systematic discussion of the inability of balanced portfolios to protect investors in periods of rising interest rates and discussion of the need to increase allowable investment hedges inside of retirement accounts can be found in an article titled Protecting Workers Saving for Retirement from Inflation.