Will tariffs stall stocks and economy?
President Donald Trump on March 8, 2018, imposed tariffs on steel and aluminum imports despite threats of retaliation from some of the largest U.S. trading partners. Trump’s plan initially will exempt Canada and Mexico from the tariffs and allow other countries to petition for similar exemptions.
Investors already are wrestling with a wide range of market factors, including the very real possibility that 2018 will be the beginning of the end of unprecedented liquidity, historically low interest rates, low volatility and tight credit spreads. Global monetary policy is changing and markets have turned more volatile since the start of the year.
Trump’s announcement of the new tariffs, followed by the resignation of top economic adviser Gary Cohn, added additional variables for investors to consider. In addition, the negative response from major trading partners compounds concerns about the potential for trade war.
Economic and market impact
On an absolute basis, we do not believe there can be winners in a trade war. However, the market in response to the announcement does not seem to be discounting the possibility of highly disruptive trade policies. In our view, that means in part that Trump’s decision on a new top economic adviser to replace Cohn will be especially important.
In our view, the tariffs on steel (25%) and aluminum (10%) alone are not likely to have a major impact on U.S. economic growth and inflation. However, if this is the start of a broad array of tariffs and protectionism then growth, inflation and markets could feel the effects. Trade wars historically have been very harmful to the economy and markets.
While we have long believed that Trump would issue one-off tariffs on various products but avoid any actions that would cause significant economic harm, we are becoming more anxious about the potential for further changes.
As an economic adviser, Cohn was widely regarded to be a voice of reason in the White House. He reportedly had wanted to leave his position for some time, but stayed to oppose the idea of tariffs. While any president’s economic advisor doesn’t hold a lot of power, it now will be important to see if another pragmatist is appointed to the position. If the next top advisor instead is a trade protectionist, we would consider that to be a concerning sign about the direction of U.S. economic policy.
It’s important to note that we do not believe the bull market is over. We think rational trade policy and corporate earnings will carry the day and continue to provide support. However, markets may be a bit more tumultuous going forward as the discounting mechanism that is the essence of the stock market deals with a battle involving the potential price volatility, corporate earnings growth and uncertainty in geopolitics.