That pesky thing known as the Federal Reserve dashed some cold water on the Trump rally last week, as Fed Chair Jerome Powell indicated that they were in no hurry to cut rates further and markets lowered the odds of another rate cut in December to 60%. Small cap stocks, one of the biggest winners from Trump’s presidential election victory, gave back some gains on the prospects of higher for longer, though some of the decline could also be attributed to traders taking gains following the sharp post-election rise. Geopolitics have also sent some jitters back into markets and all eyes are on Nvidia today as it will report third quarter earnings after the market close.
Nonetheless, the general effects of the Trump trade are still in place, as the S&P 500 remains up nearly 2.5% since election day (through yesterday’s close). Speaking of the Trump trade, potential Trump policies are being speculated on continuously, but right now, tariffs seem to be at the forefront of markets’ (and clients’) minds, so we’ll dedicate the bulk of this blog to that topic.
On the surface, tariffs are simple: they are a tax imposed by a government on goods and services imported from other countries. Tariff taxes are paid by the importer, typically with the goal of either raising money for the government and/or increasing the competitiveness of domestically produced goods. Of course, few things are actually that simple in today’s highly interconnected and polarized world.
However, whether they are “the greatest thing ever invented” (Trump’s words) or a “National Trump tax” (Kamala Harris’ words), more tariffs, or at a minimum the possibility of more tariffs, are likely on their way following Donald Trump’s presidential election victory. While tariffs are nothing new, a look at Google trends indicates that many are quickly trying to get up-to-speed on what tariffs are as Google search interest on the topic “tariffs” is hitting all-time highs – perhaps most concerningly in the District of Columbia.[1]
On the campaign trail, Donald Trump was quite clear that he intends to increase tariffs on imports, but most prominently on Chinese imports. While many numbers were thrown around, the two that seem to have gained the most traction in commentors analysis are a blanket 10-20% on all US imports and a 60% on all Chinese imports (currently around 20%). According to an analysis by Schwab[2], implementing these two policies alone could result in an overall average weighted tariff rate of 26% on all US imports, the highest in over 100 years. Schwab goes on to note that these tariffs would almost certainly be met with counter-tariffs by other countries, but they are also quick to conclude that the extreme tariff scenarios are unlikely to be implemented – a view that seems to be widely held by markets given the reactions thus far as earnings estimates are holding steady:
It’s hard to be certain what Trump will do once in office, but signs point to increased likelihood that tariffs will be used as a negotiating tactic rather than an all-out trade war. To be sure, some forms of additional tariffs are likely, especially on Chinese imports. However, there are so many variables at play, that forecasting the full impact is a bit of a fool’s errand – we sympathize with the frustrated economists having trouble forecasting Trump 2.0.[3] That doesn’t stop them from trying, they do have a job to do after all, and we are more than happy to hear what they say.
Thus far, our best summation of the variables at play include:
- Actual tariffs implemented (which countries, which products, and what levels).
- Counter-tariffs implemented.
- How much of the tariffs are absorbed in business margins vs passed along to the consumer?
- How much do currencies depreciate to offset tariffs?
- How much do protectionist policies impact global sentiment?
There are more, of course, but looking at the above list seems like a good place to start. Using 2018 as a proxy, the tariffs were ultimately taken in stride by the market, likely because the net amount was somewhat negligible relative to global trade, as tariff revenue to the US Treasury peaked just below $100 billion in 2022:
They did have a real impact though. If nothing else, there has been a notable decline in imports from China, though some of this is likely due to near-shoring on the heels of COVID-19:
If a goal was to reduce dependency on China, maybe they worked?
It is also worth noting that from a company perspective, tariffs (currently) don’t hold a candle to the topic(s) du jour: Inflation, Rates, and the Fed:
We are still in the very early days of Trump 2.0 – Joe Biden is still our president after all. While Trump’s shadow looms large, Fed Chair Jerome Powell’s (and that of artificial intelligence (AI)) still seems to loom larger. Tariffs may dominate headlines and speculation, but inflation and rates are still dominating markets.
[1] https://trends.google.com/trends/explore?date=2015-12-31%202024-11-18&geo=US&q=%2Fm%2F0ffnx&hl=en
[2] https://international.schwab.com/story/five-investing-impacts-trade-war
[3] https://www.bloomberg.com/news/newsletters/2024-11-18/economists-struggle-to-model-a-new-trump-era
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