TARIFFS AND THE STOCK MARKET

Note:  This is an article about the economic and stock market impact of the recent tariffs introduced by the United States government.  The information and opinions have nothing to do with politics.  There are many outlets that you can turn to for that.  I hope to provide more depth to the financial impacts beyond the headlines – something missing from the discussion.

The stock market obviously did not like the Administration’s new tariff plan.  The market has been drifting lower in anticipation of the new tariffs, but it really cratered yesterday after the plan was unveiled.

What might happen next in the stock market?

I believe the short-term future for stocks is dependent upon the real game plan for the Administration. Nobody outside the Administration knows their ultimate objectives but there are only two possibilities.  One scenario could lead to good outcomes and the other could be bad.

1. Better scenario – This is just a negotiating tactic by the Administration to get better trade deals for the United States.  This has been the pattern for this Administration in the past and the announcement yesterday used the phrase “open up markets overseas for US made products.”  Opening up foreign markets to US products only happens with more favorable export terms for the US.  Under this scenario, the tariffs will only be in place temporarily – until better trade terms can be negotiated.

2. Bad news scenario – The Administration is adding new tariffs to increase manufacturing activity in the United States and to bring back manufacturing jobs. If this is the case, the Administration plans on keeping these tariffs in place for the long-term.  In the announcement, the Administration mentioned “bringing back manufacturing jobs in the US.

I say that possibility number 2 is a bad news scenario because economic history is very clear on this topic. These new tariffs will lead to:

• Higher inflation – This would be bad because inflation had been dropping to more acceptable levels and higher prices could lead to less economic activity.

• Retaliation – If the tariffs are to remain in place for the long-term, other countries will raise tariffs on US goods exported to those countries.  This could lead to a spiral down in global economic activity. 

Things could get really bad under scenario number 2.  The US and global economies would likely fall into recession and stagflation would become a possibility. Under scenario 2, the stock market could fall significantly more.

MY GUESS

I have to believe that the Administration’s goal is Scenario number 1 – a negotiating tactic.  I can’t believe that the Administration really believes that using tariffs to bring back manufacturing could work. The economic pain would be extreme if the tariffs stay in place for a long time.

Even if they are following Scenario 2, I believe the administration will be forced to back off most of the tariffs.  As long as they get a few wins with some trade deals, they can claim victory and begin lowering the tariffs. 

Unfortunately, I also think that the strength of the US’s negotiating position is going to decline over time.  When the economy begins to decline and the stock market continues to fall, other countries will call the bluff.

WHAT TO DO

If you don’t have a disciplined system in place to avoid getting crushed in stock market meltdowns, now would be a good time to sign up for our Market Signals newsletter.  The current decline could turn into one of those ugly and devastating bear markets.

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Stay Disciplined My Friends,

Phil

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