Tariffs And Returns: Lessons From 150 Years Of Market History

A recent analysis of 150 years of data reveals that while the U.S. has seen multiple high-tariff regimes, equity markets have generally performed well, with systematic equity factors like low-volatility, size, and value consistently adding value, even during periods of heightened protectionism such as the Protectionist Peak and Smoot-Hawley era; the study suggests that these factors can provide stability and enhanced returns for investors navigating renewed trade volatility, despite the potential for tariffs to increase input costs and macroeconomic uncertainty.

Analysis

The re-emergence of broad-based U.S. trade tariffs in early 2025, reversing decades of liberalization, has reintroduced market volatility and geopolitical tensions, compelling a reassessment of portfolio resilience. Historical analysis over 150 years, leveraging an extensive proprietary dataset, reveals recurrent high-tariff regimes in the U.S., including the post-Civil War 'Protectionist Peak' (1875-1913) with effective tariffs around 30%, and the 1930s 'Smoot-Hawley Era' with average tariff rates reaching 45%. These periods contrast sharply with the post-WWII liberalization and the 1990s-2000s integration, where average tariffs fell to 1.5-2.5%. The recent 2025 policy involves a 10% blanket tariff plus additional levies, creating persistent policy uncertainty. Historically, such protectionist measures have correlated with declines in trade openness, a trend now potentially accelerating. Interestingly, the 'tariff-growth paradox' observed in the data indicates that U.S. real GDP growth was marginally higher during some historical high-tariff periods (e.g., 3.9% annual average during the Protectionist Peak and over 5% during the Smoot-Hawley era, compared to 2.2% since the 21st century), though the report cautions that today's highly interconnected global economy with complex supply chains may face greater opportunity costs from protectionism. Regarding investment returns, equities have demonstrated resilience, with real annual returns averaging 5.3% during the Protectionist Peak and 5.1% during the Smoot-Hawley era, broadly in line with long-term averages. More significantly, systematic equity factors, particularly low-volatility, size, and value, consistently added approximately 2.0% over the broad market during these high-tariff regimes. Low-volatility strategies were notably strong during the 1875-1913 period, while the size factor excelled during the Smoot-Hawley era, suggesting that resilient, lower-risk companies and potentially discounted cyclical firms can perform well despite increased input costs and macroeconomic uncertainty fueled by tariffs.

Key Decisions for Investors

• Investors should consider incorporating systematic equity factors, specifically low-volatility, size, and value, into their portfolios, as these have historically demonstrated resilience and outperformance during periods of heightened trade protectionism and market volatility.
• Given the renewed tariff environment and potential for retaliatory measures, it is crucial to actively monitor geopolitical developments and shifts in trade policy, as these can significantly impact market dynamics and specific sector exposures.
• While historical data suggests equities and certain factors can navigate tariff regimes, investors must acknowledge that the modern global economy's increased interconnectedness and complex supply chains may lead to different economic impacts compared to past protectionist eras, warranting a cautious and adaptive investment stance.