Tariff Clouds Hover Over Stock Markets

MIKE TOWNSEND: If you're like me, you might have a hard time believing that Donald Trump's second term as president is not even a month old. Given all that has happened, it feels like it's been a lot longer than that. Here in Washington, it seems like everyone, no matter where they fall on the political spectrum, is running around with their hair on fire, trying to keep up with the rapid changes that are upending the nation's capital. 

The U.S. Agency for International Development, USAID, perhaps the largest force for humanitarian aid around the globe, has been all but shut down. More than 2.3 million federal workers received a buyout offer—though now that's in the hands of the courts. Elon Musk's Department of Government Efficiency had, at least briefly, access to the Treasury's massive payments system, though that, too, has been curtailed now by the courts. On a less dramatic scale, the president ordered a pause on the minting of pennies.

But through all of it, only one of the many headline-grabbing executive orders has really moved the markets: President Trump's announcement that he would put 25% tariffs on all imports from Canada and Mexico, as well as a 10% tariff on imports from China. Just hours before the tariffs on Canada and Mexico were to go into effect, the president paused them for 30 days, temporarily reassuring the markets. But it's clear that the tariff debate is far from over. The China tariffs have gone into effect, tariffs on imports from the European Union are reportedly coming later this month, and new 25% tariffs on imported steel and aluminum were announced this week. And the administration has said that more is coming. Investors are scrambling to sort out what the ramifications will be.

Welcome to WashingtonWise, a podcast for investors from Charles Schwab. I'm your host, Mike Townsend, and on this show, our goal is to cut through the noise and confusion of the nation's capital and help investors figure out what's really worth paying attention to.

I think that mission is really important right now. Over the last couple of weeks, I've done several media interviews, multiple client presentations, even just talking to colleagues, and everyone has lots of questions about what's going on in Washington. Things are moving so fast that it's hard to keep track of it all. But a lot of what is happening hasn't had much effect at all on the markets. 

I am a political junkie who has worked in Washington for more than 30 years. I find pretty much everything that happens in this town endlessly fascinating, and I'd be happy to yammer on about it for hours. But as my three children remind me frequently, not everyone, or even most people, share my love for the minutiae of politics and policymaking. The goal of this podcast has always been to shine a nonpartisan light on what happens in Washington that impacts the economy, the markets, and investors' portfolios. Many of the questions I've been getting are beyond the purview of the mission of WashingtonWise, but I am committed to focusing on the key parts of the new policy agenda that relate to finance and investing. I'll continue to enlist the knowledge of our market experts to share the facts, acknowledge concerns of investors, explore the implications for the economy and the markets, and help listeners think through how their portfolios could be affected. 

To that end, in just a few minutes, I'm going to dive into the details on the president's evolving tariff plan with Jeffrey Kleintop, Schwab's chief global investment strategist. We'll talk about the implications of tariffs on our economy, inflation, the supply chain, and the economies of our allies.

But first, here are three things I'm watching in Washington right now.

Federal Reserve Chairman Jerome Powell was on Capitol Hill this week to deliver his semi-annual testimony on monetary policy to Senate and House committees. Normally, this would be perhaps the biggest headline in Washington, certainly for market watchers. But this week's appearances felt a bit beneath the radar, given everything else coming out of the nation's capital.

Powell did not break much new ground, reiterating in his prepared remarks much of what he said after last month's decision by the Fed to pause its rate-cutting cycle. He told lawmakers that "the economy is strong overall and has made significant progress toward our goals over the past two years." He called the labor market "solid," while acknowledging that inflation remains "somewhat elevated" above the Fed's 2% target. 

In late January, after the FOMC meeting, Powell told reporters that the Fed would be assessing how policies of the Trump administration, particularly in areas like tariffs, immigration, and taxes, could impact economic growth, inflation, and the jobs market. In his Capitol Hill testimony, he only obliquely referred to "risks and uncertainties" that lie ahead. During questioning from lawmakers, he said it was too early to even project what the impact would be until the details were known on fiscal policy. It's clear, however, that the potential risks to the economy are giving Fed members pause. And interest rate traders, according to CME's FedWatch tool, are split about 50-50 on whether there will be any change to the fed funds rate before July.

Overall, the takeaway is that the Fed seems in no hurry to resume the rate-cutting cycle. Per usual, they'll let the data tell the story.

Elsewhere in Washington, I'm keeping an eye on the rapid demise of the Consumer Financial Protection Bureau. The CFPB, as it's known, was created by Congress as part of the Dodd-Frank Act, the post-financial crisis law, as a new agency focused on protecting consumers from unfair and deceptive practices in areas like credit cards, mortgages, cash advances, and auto loans. It opened its doors in 2011, as an independent bureau within the Federal Reserve. That means it receives its funding through the Federal Reserve, not from Congress through the annual appropriations process. Republicans spent years challenging the funding mechanism, but in 2024, the Supreme Court ruled that the CFPB structure was constitutional.

Over the past two weeks, the CFPB has been effectively dismantled. President Trump fired CFPB Director Rohit Chopra and put Treasury Secretary Scott Bessent briefly in charge. Bessent put a pause on much of the agency's work. Then late last week, after Russell Vought was confirmed by the Senate as the director of the Office of Management and Budget, he was named the agency's acting director. He immediately ordered a halt to all of the agency's activities—shutting down enforcement proceedings, rulemaking, investigations, and supervision of financial companies. He closed down the headquarters for at least a week, literally telling employees that they could not do any work at all. The agency's X account and website are offline. Vought also said that the agency would not take any funding this quarter from the Fed, pointing to the fact that the CFPB has hundreds of millions of dollars in its bank account.

It's not clear what will happen going forward to the agency, which, along with USAID, is becoming the poster child for a fundamental battle over whether the executive branch has the power to defund and dismantle an agency created specifically through a law passed by Congress. That issue will ultimately be settled by the courts, and it could take a while. 

In the meantime, I'll be watching to see how both consumers and companies react to the shuttering of the consumer protection agency. If consumers find themselves with little recourse to challenge predatory behavior by financial institutions, will they complain to their elected representatives? And will financial institutions begin to realize that having federal rules of the road may be better than being subject to a patchwork quilt of state laws? Or will consumers and businesses see the benefits of shutting down what some claim is an overzealous and duplicative agency? None of this will be resolved anytime soon.

And finally, one of the more under-the-radar executive orders that President Trump has issued was one last week that launched a process to create a sovereign wealth fund. The order directs the Secretary of the Treasury and the Secretary of Commerce to come up with a plan within 90 days to create the fund, including wrestling with a series of tricky questions, such as the funding mechanism, the investing strategies, the structure of such a fund, and the governance of it. Trump has raised the idea of using the fund to buy TikTok. 

The countries that have sovereign wealth funds usually fund it through massive budget surpluses, typically the result of a plentiful natural resource. Norway and Saudi Arabia are examples of countries whose sovereign wealth funds are the result of oil and gas resources. There are also 21 U.S. states that have their own sovereign wealth funds, including Alaska, North Dakota, and Texas, all of which are a result of oil and gas.

The United States, of course, does not have a budget surplus—it has $36 trillion in debt. There are examples of countries with debt that have sovereign wealth funds, most notably France. France runs both a budget and trade deficit but has a fund that invests strategically in emerging sectors. 

There are a lot of questions about how a U.S. sovereign wealth fund would work—but it is an idea that has had bipartisan support in the past. The Biden administration looked into starting one a few years ago. Congress will likely have to be involved in the creation of a fund, and the details are going to be very important. But there's a bit of momentum here that will be worth following to see whether plans come together by the early spring deadline.

On my deeper dive today, I want to focus on how the markets are thinking about the flurry of foreign policy and trade issues, particularly tariffs. While many expected the new administration to be focused on taxes and other domestic issues right out of the gate, foreign policy has been front and center during the first weeks of the Trump administration, with tariffs, China, foreign aid, the Panama Canal, and the Middle East among the topics in the headlines. The news on tariffs has been moving particularly fast, with multiple announcements each week. 

To really understand the potential implications for investors, there's no one better than Jeffrey Kleintop, chief global investment strategist here at Schwab, and he joins me now. Jeff, welcome back to WashingtonWise.

JEFFREY KLEINTOP: Thanks for having me back, Mike. It's great to be here.

MIKE: So tariffs. Donald Trump says it's his favorite word in the English language. It might just be the most repeated word in the English language over the last couple of weeks. Earlier this month, there was a mini meltdown, as he imposed tariffs on imports from Canada and Mexico and then paused them for 30 days after a series of back-and-forth discussions with both countries produced a temporary truce. You wrote a piece in January about how the tariff threats were more bark than bite, a perspective that seems now to be very prescient. The U.S. market sold off rapidly after the tariffs were announced, and global markets did as well. They recovered, but it feels like we may be in a period where the markets are walking on eggshells, constantly waiting to see what's next. The resulting volatility feels like a feature, not a bug of what the president wants here. 

JEFF: Yeah, there's no doubt Trump has grabbed the market's attention from day one, after what was an unusually calm transition period from Election Day to Inauguration Day when markets had barely budged. You mentioned the Mexico and Canada tariffs. He also announced 25% tariffs on Columbia, then took them off before they began. In all three of these cases, the tariffs appear not to be about economic policy, but about gaining concessions on illegal immigration and related issues. 

The number one surprise in our top five surprises for 2025 was tariffs being much higher and then abruptly dropped or sharply reduced. Tariffs being more bark than bite so far supports our outlook for both heightened market volatility and our positive outlook for the markets this year. But there's a lot more to come on this, and while a pattern may appear to have been established, the market is far from done with tariff risks this year.

MIKE: Well, Canada is feeling betrayed. They're booing the U.S. national anthem at hockey games and putting up billboards advertising snacks that are made with 0% American cheese. Canadians are making a push to simply not buy American. American alcohol is being pulled from shelves in some provinces, and boycotts of all U.S. goods have been called for. Prime Minister Justin Trudeau is encouraging citizens to buy Canadian. While that may have some fun, anecdotal impact, is any real impact on the U.S. economy or companies likely? 

JEFF: I don't think so, Mike. The pulling of U.S. alcohol brands from store shelves in Ontario definitely got some media attention, but the majority of Canadian imports from the U.S. are not consumer goods. They're actually machinery or other capital goods bought by businesses. So a consumer boycott that could be more impactful would be a boycott on U.S. tourism, which ironically is on the services side of the economy and not subject to tariffs. Canada—this may be a surprise—Canada is the top source of international visitors to the U.S. The U.S. Travel Association points out that even a 10% reduction in Canadian travel could mean two million fewer visits, and over $2 billion in lost spending, and probably some lost jobs as well. Now, that isn't big enough to move GDP numbers, but it could matter to some tourism-focused industries. 

MIKE: Yeah, the tourism angle is really quite interesting, not something most of us have thought about. It's really a type of soft diplomacy, individual Canadians exercising their fiscal power to push back on Trump's actions. Interesting to note that the top five states visited by Canadians are Florida, California, Nevada, New York, and Texas. So a mix of red states and blue states. It will be interesting to see if they target red states, as they've tried to do with alcohol.

But I've also been thinking about whether a 30-day pause really fixes anything. The current delay expires on March 4, and it's not at all clear what the White House is expecting will happen between now and then. This is just another element of uncertainty for companies that are trying to figure out a way to plan for this. Should we be concerned that companies could start to raise prices preemptively in anticipation of tariffs coming next time or sometime further down the road? 

JEFF: Absolutely. A tariff delay can still pose these kinds of problems. Companies may preemptively raise prices, and that could lift inflation. Look, The Wall Street Journal reported that U.S. Steel announced a $50-a-ton price increase for flat-rolled steel last week. The steel makers were big proponents of Trump's tariff plan. And at the same time, businesses might hold back on investment, given the uncertainty. So to me, a delay is like the worst outcome. You risk higher inflation and uncertainty holding back investment, and you don't collect any new tariff revenue. I think the tariff delays get extended, but they don't get canceled entirely, and that keeps this cloud of uncertainty lingering. 

MIKE: You mentioned steel. Earlier this week, the president announced 25% tariffs on aluminum and steel imports beginning on March 12. The U.S. imports a lot of both, and the impact to U.S. manufacturers would be significant. And we saw flexibility from Trump with the Canada and Mexico tariffs. This feels like another announcement where there could be some adjustment in the month before it takes effect. 

JEFF: Yeah, I think your feelings are on target with this one, and those 25% aluminum tariffs might be reduced or eliminated for some countries prior to being implemented on March 12. And if you think back to the last time Trump did this during the 1.0 tariffs, steel tariffs were 25% and aluminum was 10, and there was a good reason for that. And I think the markets are looking through some of this. We're not seeing aluminum prices in the U.S. deviate much from those in Europe. If we look at the COMEX and LME commodity exchanges, despite all the headlines, and I think the markets are betting that we're not going to see that big of a gap on aluminum. See, the price of aluminum is basically just the price of energy. Bauxite is cheap. It's $480, the last day or two here, per metric ton, and it takes about 4.4 tons to make one ton of aluminum. But turning it into aluminum consumes a ton of electricity, about 17,000 kilowatt hours to make one metric ton of aluminum from bauxite. That's over $24,000 at current U.S. prices. So it tends to be made where electricity is cheap. 

U.S. imports about half of our aluminum, per the Department of the Interior data from the U.S. Geological Survey, because the cost of electricity is lower in countries like Canada. Canada has got abundant hydroelectricity, so they can make it cheaper. The U.S. would need to make a lot of investments in electrical infrastructure and generation to make aluminum production more viable in the U.S., and that could take years. By 2028, some U.S. utilities may need to increase their annual energy generation by more than 25% in order to just meet the projected demand from AI data centers. That's according to estimates by a consulting company, Bain. And that's far beyond the largest five-year generation boost of about 5% that U.S. utilities achieved over the last 20 years or so. So it's not easy to do.

So in the short term, a 25% tariff on aluminum is likely inflationary. And it's used to make a lot of stuff, from airplanes and cars. Those are two areas where the U.S. competes on a global stage. Major U.S. manufacturers are likely reaching out to the White House to make their voices heard on how potentially damaging to U.S. competitiveness a 25% tariff could be. Markets seem to be betting that 25% aluminum tariff follows the typical pattern and gets reduced or eliminated before it's implemented on March 12. 

MIKE: Well, whether it's steel or aluminum or lumber, most any imported product, another possible impact here is that companies may go on a bit of a buying spree, stocking up out of fear that tariffs could take effect down the road. There's a time and use of money issue, but a 25% price hike could be enough to make stockpiling worth it. And then if that happens, we might see a similar problem as we had coming out of COVID, disruption to the supply chain, a boost in prices and inflation as a lot of people are going after a limited amount of goods. 

JEFF: Yeah, we all remember the toilet paper shortages, and we certainly do get a lot of paper products from Canada, along with all wood products. Look, stockpiling can create shortages and price spikes, and there are incentives to do that here. We haven't seen it yet in lumber, a lot of which comes from Canada, but we're going to be tracking it pretty closely. I like to track all this stuff. 

Another thing, though, that I think is important on this Mexico and Canada tariff issue is that, while it may seem that the U.S. holds all the cards on negotiations with Canada and Mexico, given their economic dependence on exports to the U.S., the exposure of companies is different. Based on my analysis, tariffs on U.S. imports from Mexico would likely have a disproportionately negative impact on U.S. businesses, and not Mexican ones. 

Mexico's largest exports to the U.S. are goods produced by U.S. companies operating in Mexico, rather than Mexican companies. For example, autos are the biggest category of Mexico's exports to the U.S. Mexico's biggest exporters are automotive manufacturers headquartered right here in the U.S., including Ford and GM. In contrast, a lot of the Mexican businesses that have large U.S. sales, they come from their operations in the U.S. that wouldn't be subject to tariffs, like Cemex, the big Mexican cement maker. They don't make cement in Mexico and ship it to the U.S. They make it here. And in fact, four of the top five Mexican stocks that make up more than half of the MSCI Mexico Index are not likely to be directly affected by the tariffs because they serve the Mexican market. They don't export to the U.S. One is a bank, one is a Coca-Cola distributor from Mexico, one is a telecom provider, and one's Mexico's Walmart. In fact, it's just the mining company, Grupo Mexico, that will be directly affected.

And that applies to Canada as well. Outside of energy exports, the largest Canadian exporters to the U.S., they're the automakers—Ford, General Motors, Stellantis, Toyota, Honda—not Canadian companies. 

And that might help account for why the Canadian and Mexican stock markets continue to outperform the S&P 500^® this year even before the tariffs were delayed. It also may mean these big U.S. companies may want to have a voice in the negotiations and want Trump to keep the tariffs from being implemented. 

MIKE: Hey, Jeff, I really appreciate that explanation of how tariffs work, particularly in Mexico and in Canada, and I think it goes to the real misunderstanding among the average member of the U.S. public of how tariffs work and how they impact things. So that was a really excellent explanation. 

You know, the place where maybe there's less flexibility on tariffs is China. Trump has imposed a new 10% tariff on imports from China—that's gone into effect—and China quickly retaliated. And somehow it feels like this has flown somewhat under the radar. It feels like maybe this is the real news of the tariff war so far. I mean, China's leaders weren't leaping on the phone hours after Trump's announcement to negotiate. Both sides are playing a much longer game. The new tariffs, of course, are layered on top of the tariffs that were imposed on China in 2018 and 2019 during Trump's first term, and which Biden left in place. When China just seems to take this in stride, it makes me wonder what the long-term goal is. 

JEFF: Yeah, this is the one that actually stuck, right? Got implemented, the 10% tariffs on China. Now, they were widely expected to go in place, but they were implemented at 10%, not the 60% talked about on the campaign trail. So here again is another case of Trump backing down, at least initially, on the size and scope of tariffs. An announced 10% increase in tariffs did go into effect on February 1, but China's response has been really pretty limited. It went into effect this week, really kind of aimed at avoiding any escalation. And that might be because China is more focused on its domestic economic concern, and the weakness there, and consumer spending within China, rather than friction on direct trade with the U.S. Direct exports to the U.S. only makes up about 3% of its GDP. But most of China's GDP comes from its own domestic consumer spending, so they're really focused on that. But Trump did refer to that 10% tariff announcement as just an opening salvo. 

The executive orders that Trump signed on day one included a directive to review the existing China 301 investigation, as well as those 2020 Phase One deal terms by April 1, signaling we might see some further U.S. actions here. China might respond to that with offers to buy more U.S. goods, or maybe concessions on geopolitical issues, like the ceasefire discussions between Russia and Ukraine in the negotiations that might follow there on April 1. 

But in the meantime, import and export data reveal that exporters based in China seem to be able to get around those tariffs by exporting to Cambodia, or Vietnam, or Thailand, or others and then deliver those products onto the U.S. from there. Since the tariffs went into effect back in 2018, there's a lot of evidence that that's happening. And that rerouting of trade helps them avoid the impact of tariffs directly on the economy and markets, and maybe helps avoid the inflationary impact as well. 

MIKE: What about the EU? Tariffs on steel and aluminum could hit the European Union hard, and Trump has threatened additional tariffs on imports from the EU, less to address a particular issue like immigration or drug trafficking, more to reduce the trade deficit itself. And that would keep pace with the somewhat surprising theme of this conversation of igniting trade disputes with our allies. 

JEFF: Yeah, the EU tariffs are coming, but I don't know exactly what they're going to look like. Europe's policymakers have learned that the White House is open to negotiation on tariffs, and that's a positive factor for averting a trade shock and boosting the region's growth outlook, which is already on the mend. But it's going to require political leadership in Europe to drive those negotiations. Germany, which is, of course, Europe's biggest economy and a major auto exporter to the U.S. has an election on February 23. And it may be that Trump is awaiting the outcome of that election to engage in discussions because you've got to have someone to engage in discussions with. So they may be coming here after February 23.

But they may take the form of these reciprocal tariffs, right? So instead of this across-the-board tariff, this is a new phrase, "reciprocal tariffs," that Trump's been using over the past week or so. The EU does have higher tariffs than the U.S. on some things—some agricultural products, some chemicals, and cars. And a threat by the U.S. to match those tariff levels may actually bring them down. There's been some discussions behind the scenes in the EU about lowering that 10% tariff applied to U.S. autos down to the 2.5% it is in the U.S. on European autos. So maybe tariffs could counterintuitively go down as a result of these discussions. We'll have to see. 

But it's a little confusing because we had some comments over the weekend by a White House deputy chief of staff, who pointed out that the White House seems to be adding EU sales taxes, the VAT, and maybe even carbon taxes to the comparison, even though those apply to both imports and domestic goods in the EU. 

So I'm not sure what is going to happen there, or what they actually mean by reciprocal tariffs, but it seems like a more targeted tariff negotiation could come about here in the coming weeks with the EU. 

MIKE: We will see how it plays out in the EU. But I do think all of this gets to a larger underlying question of what exactly is the goal of tariffs? On the one hand, President Trump just doesn't like trade deficits. He thinks they make the United States look weak. The trade deficit with the EU is our second largest after China, and the president wants to close that gap. But that runs up against the reality that tariffs are inflationary and can be a hit to economic growth. And we know that President Trump is very sensitive to stock performance and data about the strength of the U.S. economy. So I think that's why we've seen a much more measured approach to tariffs in the first weeks of the new administration, as compared to the campaign rhetoric, where of course he threatened 10 to 20% across-the-board tariffs and 60% tariffs on Chinese imports on day one. That's not what happened. 

The Wall Street Journal had a story late last week that I think captured this that was basically summed up as tariffs are bad economics and good politics. So the president is walking a fine line here. Because politically, optically, tariffs have been a winner so far. Whether it's Columbia or Mexico or Canada, the president has been able to say that he threatened tariffs and look what happened. They all backed down and made concessions. Now, whether those concessions are meaningful, almost seems beside the point, but they weren't really concessions related to trade. Columbia agreed to take more deportations. Canada appointed a fentanyl czar. Mexico is putting more troops at the border. But if the president begins to impose tariffs to correct what he sees as trade deficits, I think things quickly get quite a bit more complicated. That's where the focus would likely swing back to China, the EU, and Mexico, the three countries the U.S. has the largest deficits with, and then we're talking about a lot of back and forth that will take time and potentially start a real trade war. 

All that is to say that for the markets, I think the volatility we saw around the announcement of the Canada and Mexico tariffs, even if it lasted just a couple of days, is not just a short-term issue. To your earlier point, this is looking more like a long-term global issue that may not have such a quick resolution as this first volley. It feels like there's a lot of uncertainty ahead. 

JEFF: I agree. There's more to come here. So how does this evolve? And I think Japan is an interesting case. You didn't mention Japan, but Japan has a $70 billion trade surplus with the U.S. And the yen's undervaluation on almost any metric versus the dollar would seem to place it in Trump's crosshairs. But Japan's new prime minister had a very friendly meeting with Trump over this past weekend, in part due to Japan's imports of U.S. energy. Japan's dependent upon imports for almost all of its energy supplies, and gets a lot from the U.S., and Japanese manufacturers have considerable investments in their U.S. operations. In fact, Japan is the top source of business investment in the U.S. That's according to data from the U.S. Department of Economic Analysis. But the prime minister came into the meeting with an agenda of how he could help Trump with his agenda, rebuilding some manufacturing, exporting more energy, pushing back against China, check, check, check. Everyone walked away happy. Not all countries are going to have it that easy, but it's a framework that Silicon Valley CEOs also seem to have adopted. There's plenty that an increasingly right-leaning EU could do, for example, to help Trump's domestic agenda that aren't necessarily all that costly for them or were things they may have been planning on doing anyway. 

I think the risk is that everyone figures out this framework, and it all appears to work initially, but that prompts more threats. And while it may work once or twice, eventually, foreign leaders who are budget constrained and have their own constituents to deal with say that's enough, and it escalates into a more damaging trade war than Trump's first term ever advanced to. I don't know if that will happen, but it highlights that we don't know how long this could go on, and even if it seems like the Japan-like framework is the answer, that might not be the end of it, given how Trump views trade as important to his legacy. 

MIKE: Well, there's no question, Jeff, that we're going to be talking about this more throughout the year.

But I want to shift gears to another issue on investors' minds, and that's what central bankers are doing around the world. Everyone is cutting rates but us. The Bank of Canada cut 25 basis points again. Canadian inflation is at 1.8%. The European Central Bank had its fourth straight cut of 25 basis points. Inflation in France and Germany is easing and supporting more rate cuts. But the U.S. is at a higher 2.9% inflation, and paused rate cuts, and signaled that it may be a while before cutting resumes. 

JEFF: The Fed might be done, and in fact, President Trump commended the Fed for its decision to leave interest rates unchanged in January. We'll see how long that lasts. The potential for inflation-inducing tariffs is a further reason for the Fed to stay on hold for now, tying back to our earlier discussion, but that isn't the case for Canada's central bank, or Mexico's, or Europe, or many others where inflation just isn't a problem. As you point out, it's below 2%, below target in many of these places, most of these places, and they'll continue to cut rates. And that could help lift valuations in those markets relative to the U.S. 

Tying it back to tariffs again, it also means that maybe other economies could tolerate more tariffs because their bond market is pushing back against inflation risk. They've got more flexibility there before their bond markets may be pushed back against inflation risk relative to that here in the U.S. 

MIKE: And if our rates are higher, that could mean there is more demand for our debt with those higher rates. The dollar is the world's reserve currency, and investors keep a sharp eye on the dollar as a barometer for how things are going with our economy. The value of the dollar comes into play when talking about tariffs. Trump could be looking to keep the dollar strong to offset the cost of tariffs on the U.S., or he might want to weaken the dollar so that our exports are cheaper. 

JEFF: Yeah, I don't know which way he wants to go. I think different parts of the administration want to go in different directions. Generally, the dollar is perceived as a safe haven. It tends to rise when global growth is weak. The dollar is down slightly so far this year, despite all that's gone on, after rising last year on that gap in interest rates and the projected gap in rates, and the expectation of some tariffs this year. We'll see what happens from here. Even the peso and the Canadian dollar are up slightly against the U.S. dollar this year. 

MIKE: Well, Jeff, one other issue. I want to get your take on, artificial intelligence. The initial news in January of a relatively unknown Chinese firm called DeepSeek launching an effective and cheap AI language model caused a genuine market panic, but it turned out to be a blip. There was already concern about China's efforts in artificial intelligence and other high-tech arenas, and this only seemed to exacerbate that. So what are the implications for the big U.S. tech companies that are investing a fortune in AI right now, particularly if Chinese companies can do it more efficiently or at least can use U.S. chips and technology to copy what U.S. companies are doing?

JEFF: I think a key takeaway is that the battle for AI isn't just about throwing more hardware at the problem. Better models and training can make a big difference, and that may mean market leadership may be able to broaden further outside of the AI-driven theme of the last two years. You know, it's worth noting that Europe's stock market has been keeping pace with the U.S. stock market since the current bull market began back in October of 2022. And if just one stock, AI chipmaker Nvidia, was removed from the S&P 500, the European stock market, the MSCI EMU, European Monetary Union Index, will be out-performing the S&P 500® by a wide margin. And that just shows how much the S&P 500 exceptionalism was really just around one AI hardware stock. I don't know what one stock is likely to do, but if this marks a shift in the AI theme, it could mean investors may want to revisit the diversification in their portfolios. 

MIKE: Well, along the idea of what investors should do with our portfolios, I do want to circle back to our tariff discussion and end by getting your take on what investors should be considering to cushion their portfolios from tariff-driven volatility and uncertainty. 

JEFF: First of all, we don't always want to take the news at face value. We can see how the news changes, and the positioning can change very quickly, and markets can rebound. So making major changes to forecasts or portfolios tied to headlines around trade and tariffs is probably not wise given what we've seen. 

But if we're looking for maybe a safer haven from some of the trade noise, it's possible that the MSCI EAFE Index of developed international stocks might offer that. It does not contain any of the first-round combatants in the Trump 2.0 trade war. It does not include Mexico, Canada, China, or the U.S. And in fact, the two biggest country weightings in that index are Japan and the U.K., both of which seem to be getting free passes and avoiding being targeted in the trade war. And it's already outperforming this year, more than doubling the return of the S&P 500 year-to-date. There can be no guarantees, but those investments that track the EAFE Index may be a place for investors to look. 

MIKE: As always, Jeff, great perspective on some of the challenges that have a direct impact on the U.S. markets and investors. I really appreciate you making the time to talk to me today. 

JEFF: My pleasure, Mike.

MIKE: That's Jeffrey Kleintop, chief global investment strategist at Schwab. You can find him on X, formerly Twitter, @jeffreykleintop where he posts a lot of great thoughts, including a 90-second video each Monday on what investors need to be paying attention to in the week ahead that I think is a must-see each week.

Well that's all for this week's episode of WashingtonWise. We'll be back with a new episode in two weeks, when Daniel Stein, who manages two Schwab branches, will talk about how he and his teams are helping investors navigate an environment where it seems like every day there are multiple pieces of market-moving news coming out. 

Take a moment now to follow the show in your listening app so you get an alert when that episode drops and you don't miss any future episodes. And I'd be so grateful if you would leave us a rating or a review—those really help new listeners discover the show.   

For important disclosures, see the show notes or schwab.com/WashingtonWise, where you can also find a transcript.   

I'm Mike Townsend, and this has been WashingtonWise, a podcast for investors. Wherever you are, stay safe, stay healthy, and keep investing wisely.