How are tariffs and your 401(k) retirement savings intertwined?
Experts say a rise in tariffs can lead to several factors that impact your retirement savings.
- Sharp sell-off in U.S. Treasuries signals declining confidence in U.S. polices.
- Trump tariff turmoil could have a lasting impact on cost of borrowing, experts say.
- Bear markets for stocks can last four months to six months or longer, according to David Sowerby, a metro Detroit portfolio manager.
A 90-day pause on many, but not all, tariffs might give some everyday 401(k) savers a bit of hope that, maybe, the worst is over when it comes to the wild ride on Wall Street. But, please, don’t bet every buck in your nest egg on that notion.
Experts warn that more 401(k) pain could be ahead, thanks to market bears, bond vigilantes and what some financial experts call the “moron premium.”
Never heard of it? The “moron premium” or “moron risk premium” is a term that hit the charts three years ago during a British budget crisis.
Why Brexit and bonds are top of mind now
Then-Prime Minister Liz Truss backed a fiasco of a plan that proposed aggressive tax cuts without cost savings. A country that had already loaded up on debt would need to borrow more. Bond traders would hear nothing of it. Long-term government bond yields skyrocketed, and the British pound skidded off the road. The tax cut plan was abandoned; Truss resigned.
Britain was caricatured as the new Italy with a troubled economy and viewed as a “country of political instability, low growth and subordination to the bond markets,” according to a 2022 headline in The Economist.
Earlier in 2020, the United Kingdom moved forward on the controversial Brexit deal and severed political ties with the European Union; major changes relating to trade took place in 2021. The historic vote by Britons to exit the union it joined 43 years earlier took place in late June 2016.
Why are we talking now about something that happened across the pond?
Market watchers see “many echoes of Brexit in the rhetoric and policymaking coming out of the White House these days,” said Paolo Pasquariello, professor of finance at the University of Michigan.
Over the past decade or longer, he said, the United Kingdom’s policymaking had been quite erratic, even before term “moron premium” was used.
“Brexit has cost the U.K. tens of billions of pounds and much more in missed growth in the last few years alone,” Pasquariello said.
President Donald Trump, a supporter of Brexit, has put Wall Street on high alert, as economists and others fear that Brexit’s economic woes could be repeated here.
The U.S. bond market faced a crucial, transformative moment last week when U.S. government bonds faced a fierce sell-off, Pasquariello said.
In a nutshell, bond traders rushed to sell U.S. government bonds, typically viewed as a “safe haven,” on the notion that the U.S. government could no longer be trusted to avoid doing something moronic, such as dismantling the U.S. economy.
Who are the bond vigilantes?
Most people keep their eye on the stock market, but the bond market can foreshadow real trouble ahead. Typically, investors might turn to U.S. government bonds, as fears of a recession build and the stock market tumbles. Not so now. The bond market is reacting in a way that is abnormal for U.S. Treasuries.
Bond vigilantes hit the scene in early April, according to U-M’s Pasquariello, saying, “Sorry you’re not going to get our money. We’re going to sell our Treasury holdings. And so, Treasury bonds collapsed in price in ways we’ve not seen in decades.”
Who are these vigilantes? By definition, they are fixed-income traders who try to exert their power to encourage fiscal responsibility and discourage erratic decision-making.
Pasquariello told me in a phone interview that even individuals who sell bonds with a concern about trade policy could be viewed as a vigilante.
Last week’s sharp bond market sell-off included some of the worst one-day moves for many bond maturities in decades, according to experts. Bond traders essentially are saying that America has far more risk on the table now and traders want to be paid accordingly to take on that extra risk.
“The U.S. trade deficit with the rest of the world is what creates the demand for foreigners to hold its government debt. Once that demand is suppressed, the U.S. will cease to become the global supplier of safe securities,” wrote Paul Mason, a British journalist specializing in economic security and defense, in an April 12 article in The Atlantic titled “Trump Brings Britain’s ‘Moron Premium’ to the U.S. Economy.”
Foreign governments turn to U.S. debt to manage trade surpluses and currency reserves.
Many Trump supporters hope to generate more manufacturing jobs in Midwest communities, and more revenue for the federal government, with a new game plan for tariffs and trade.
Many Wall Street executives supported Trump’s 2024 election bid to ease up on government regulations and revive the spirit of the American success story.
But many didn’t sign up for the reckless rollout of the on-again, off-again tariffs early this year that triggered enormous amounts of uncertainty for America’s industries, including the automotive business.
On April 14, Trump switched lanes once again and said he was considering temporary exemptions from his 25% tariffs on the auto industry to give car companies more time to boost U.S. manufacturing.
Pasquariello senses that there was a “deep misunderstanding” on Wall Street for how Trump would handle any trade war early in his second term.
The Trump that some thought they voted for in November 2024, he said, isn’t the one that showed up in the first 100 days of Trump’s second administration, particularly when it comes to the economic disruption created by his plan for deep, widespread tariffs.
The cost of borrowing goes up for the U.S. government, not down, as investors now demand higher returns for holding our debt. The prospects for strong economic growth become dimmer, as reciprocal trade restrictions from other countries hit some American farms and factories that export overseas.
Consumers will face higher price tags, as prices rise on imported goods hit by tariffs.
The U.S. now must face wondering what policy moves to make, based on how bond market traders could react. How much will the cost of U.S-government debt go up, if such-and-such is done?
“Last week is the week where the U.S. turned into Italy,” said Pasquariello, who was born and raised in Italy and moved to the U.S. in 1996.
Bond vigilantes — who unload holdings in government securities to make a point about harmful policies — are viewed as driving countries like Italy and Greece to adopt austerity measures years ago.
The U.S. isn’t on the brink, of course. “The U.S. is not Argentina,” Pasquariello said. But the risks of holding U.S. government bonds have gone up, according to bond traders, which isn’t welcome news.
“From now on for decades,” Pasquariello predicted, “the U.S. will have to worry about the bond vigilantes.”
Worrying about bond vigilantes is quite stressful, he said. Sometimes, a bond sell-off is triggered by misinformation or something that isn’t justified by economic fundamentals.
Traders will take into account some risks that the U.S. government will engage in policies that don’t make much economic sense.
“Once in place, the moron premium will not go away for decades,” Pasquariello predicted.
“This is not a problem that can be fixed by short-term politics; this shift in perception is likely permanent,” he said.
“Trust by the bond markets takes hundreds of years to build and can be broken in a few weeks.”
“Once broken,” Pasquariello continued, “it is not going to be rebuilt soon. Even if glued back together, the broken seams will still show up and we will all pay the price of it in terms of future higher borrowing costs for the U.S. government and more recurring runs on its bonds. The genie cannot be put back in the bottle.”
Deficits can be fixed, he said, but perceptions of erratic actions cannot be repaired.
It’s a pessimistic outlook for a country built on optimism, no matter what your political persuasion.
Yet, it’s an unfortunate conversation we’re having now in mid-April as Wall Street stares into the eyes of another bear market.
How 401(k) savers will need to treat a bear market
By definition, a bear market hits when you see a drop of 20% or more from a recent bull market high for a stock index, such as the Standard & Poor’s 500 or the Dow Jones Industrial Average.
The last bear market hit three years ago, but stocks saw such incredible gains in 2024 that many investors might have forgotten what a bear looks like.
A bear market took place from Jan. 3, 2022, through Oct. 12, 2022, in response to the Federal Reserve raising interest rates, according to Sam Stovall, chief investment strategist for CFRA Research.
The S&P 500 took nine months to fall from peak to trough, losing 25.5% of its value during the 2022 bear market. It then took 15 months, he said, to recover all that was lost by Jan. 9, 2024.
Last year was a strong year for 401(k) savers. In 2024, the S&P 500 rose by 23.3%. Super-size gains from a limited group of stocks helped a great deal.
As the trade war has escalated, the stock market has taken a brutal hit. The Standard & Poor’s 500 index was down 18.9% from its record high hit on Feb. 19, 2025, through a recent low April 8. While we were still shy of that 20% threshold in early April, many market watchers view the sharp drop as the setting for another bear market.
At the close of trading on April 8, Stovall said, many U.S. equity market benchmarks posted their steepest declines during a nearly two-month sell-off for stocks.
“The S&P 500 was deep in correction territory,” Stovall wrote in a report, “off nearly 19%, while the Nasdaq 100 and S&P Small Cap 600 were squarely in bear market mode, each down by approximately 23%.”
David Sowerby, managing director and portfolio manager for Ancora Advisors in Bloomfield Hills, said investors shouldn’t expect a quick turnaround, even though the stock market has had some days when stocks are up.
“We are still only two months out of the stock market peak on Feb. 19,” Sowerby said.
“Bear markets are rarely, if ever, over and done in that short of time.” Sowerby said. “They normally last four months to six months, or even longer.”
His forecast: “Expect more fits and starts.”
When it comes to bear markets, Sowerby said, a good rule is to do your best to avoid capitulation or just outright selling of your stock portfolio because you cannot watch the market losses pile up.
“Be a modest selective buyer with many companies still down 20% or more,” Sowerby said.
The temporary tariff pause might give room for the bear to take a nap, but much more will need to be known about how tariffs ultimately will unfold before the all-clear signal can be given.
Contact personal finance columnist Susan Tompor: stompor@freepress.com. Follow her on X @tompor.
