The Trump Tariff War and Markets

What do President Trump’s tariffs mean for global markets? They’re having an impact already, and certainly not in a positive way. Here are four immediate impacts and their effects on markets.

 

Indirect Tax on the Poor

 

Tariffs, among other things, are an indirect tax on the poor. They disproportionately burden low-income households due to their upward price impact on essential items. Clearly this will put further strain on an already struggling American lower and middle class. The broader implication here though is the effect on US consumer spending. Already in January, US consumer spending fell (by 0.2%). This is the first drop in nearly two years, but this is before the tariffs are even in place. Expect more and much larger drops in spending. What does this mean for US companies?  Inevitably, a softening in revenues. This will be felt more so by those with a domestic focus. More on this later.

 

Inflation

 

Just when the Fed looked like they were getting the Covid-stimulus-induced inflation under control, Trump decided to impose a guaranteed inflation-booster to global markets. The moment a tariff is imposed, the cost of goods goes up. This is pretty much the definition of inflation – combined with the declining purchasing power of money. This makes the Fed’s monetary policy job that much more difficult, and interest rates won’t go down while inflation is going up. Remember the gravity-like effect of interest rates on markets. The higher the reward for not investing in risk assets (i.e. leave it in the bank or own Government bonds), the higher the reward for investing needs to be. That is, all else being equal, share prices need to be lower to justify investment.

 

Global Trade

 

This form of protectionism from the Trump administration is undoing decades’ worth of globalisation. The benefits of global trade are obvious – nations are rewarded for playing to their strengths, while outsourcing their inefficient industries. The end result is that the consumer benefits via lower prices for goods.  Tariffs have the exact opposite effect, as outlined above.

There will be further impacts as America’s trade partners respond. There will obviously be retaliatory tariffs. One of the great shames of this is the undermining of decades-long trade agreements. These trade agreements are the fruits of years and years of effective diplomacy and negotiation. They are being flippantly discarded by an egotistical autocrat. The longer-lasting impact here will be the shift away from the US as a trade partner. Nations around the world have for a very long time partnered with the US as a reliable counterpart.

Worse than the tariffs themselves is Trump’s unpredictable nature. He has already backpedaled on many of the tariffs, and who knows what his inclination may be tomorrow. This erodes confidence, which is possibly more damaging than the known knowns. Trade partners have no alternative but to seek out new relationships and agreements, and de-risk from America. America as a trade partner is suddenly far riskier than it had been for the last fifty years.

At a company level, Walmart has already asked Chinese suppliers to cut prices by 10% to soften the impact of Trump’s 20% Chinese goods tariff. I’m no foreign trade expert, but the Chinese are not known for being forgiving to hostile economic gestures. Around 83% of Walmart’s revenue is in the US. The impact of the tariffs is going to be felt by the consumer, but Walmart is now less attractive as an investment too. This is one of many examples, to illustrate the point.

 

Retreat from the US

“The US push to reduce trade deficits and escalate tensions with key allies puts at risk the ability of US assets to draw in capital from the rest of the world. It’s a dangerous time to be overexposed to US assets, and almost everyone is.”

The move away from the US won’t be limited to Governments and trade deals. This will extend to the investment community also, as the world is far too exposed to the US market. As at the end of January, the US represented around 73% of the MSCI World Index. Greg Jensen, co-CIO at Bridgewater Associates with Ray Dalio, summed it up well earlier this month when he wrote: “The US push to reduce trade deficits and escalate tensions with key allies puts at risk the ability of US assets to draw in capital from the rest of the world. It’s a dangerous time to be overexposed to US assets, and almost everyone is.”

The US has been a great bet over the last ten years and has produced some incredible companies. However, we’re now looking at an overpriced US market (the S&P500 currently trades on a P/E of 28x vs a long-term average of around 19.4x), combined with rising uncertainty. Typically when the market gets too rich, it doesn’t take much to start the sell-off. This is no different. What is different this time though, is that the world has been jolted into a retreat from the US, due to its unpredictability. The move has started. Since early November, when Trump was elected, the Euro Stoxx 50 is up over 12%, while the S&P500 is down 2% in the same time.

 

Conclusion

 

The US is now a much riskier investment proposition. We can’t confuse high-quality companies with the Government of the time. However, when Government interferes with trade the way this one is doing, it has significant impacts. It is time to reduce exposure to the US. You never want to try to time the market, so you want to be invested, but other markets are now looking far more attractive than the US. This Government is dampening productivity, putting upward pressure on inflation and by default, interest rates, and is eroding confidence. I would expect to see a persistent move of money out of the US and into other markets over at least the term of this Government. We will be doing the same.

 

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General Advice Warning: Any advice given herein is general in nature and has not taken into consideration your personal financial objectives, situation, or specific needs. You should consider the appropriateness of the advice as it relates to you before acting upon it. Where a specific product has been mentioned, you should always consult the PDS before making any investment decision relating to it.