The stock market has started strong under President Trump’s second term, but potential tariffs remain a concern for investors. The implementation of these policies could significantly impact the market’s direction. Jeffrey Schulze, head of economic and market strategy at ClearBridge Investments, noted, "policy sequencing" could be an issue. If tariffs are put in place before the benefits of tax cuts and deregulation are felt, it could temporarily pressure stocks. "Potential market headwinds may come as greater focus before possible tailwinds are felt. This progression would be a reversal from the first Trump presidency when the benefits from deregulation and tax cuts were felt first, before giving way to 18 months of tariff-induced choppiness," Schulze said.
A chart from ClearBridge showed the S&P 500 stalled during the middle of Trump’s first term when trade war headlines impacted the market. Schulze believes tariffs should come as less of a surprise to markets this time, and with more experience dealing with Trump’s policies, investors may respond more predictably. "Importantly, tariffs should come as less of a surprise to markets this time, and the fiscal support for the economy should overpower the tariff drag in subsequent quarters," he added.
The actual content of the tariff policy is key for investor confidence. While Trump has hinted at broad tariffs, many on Wall Street expect a more targeted approach. Richard de Chazal, macro analyst at William Blair, remarked, "The probability of 10%-20% across-the-board blanket tariffs, in our minds, looks extremely low." This forecast suggests investors are cautiously optimistic but remain focused on potential impacts.
On February 1, the Trump administration will begin imposing 25% tariffs on Canada and Mexico, as confirmed by White House Press Secretary Karoline Leavitt. Conversely, China will only face a 10% tariff for its role as the conduit for fentanyl trafficking, which has allegedly claimed many American lives. Leavitt emphasized the tariffs are part of Trump's promise to curb illegal immigration and to press Canada and Mexico on this front.
"These are promises made and promises kept by the president," Leavitt stated during Friday's press briefing. She refrained from answering whether the administration would reverse the tariffs should consumer goods prices increase due to these measures.
Consumer good prices are expected to rise due to the tariffs, impacting various products ranging from clothing to vehicles. Corporations, including Walmart, have indicated potential price increases following the implementation of the tariffs.
Prime Minister Justin Trudeau of Canada has already reacted against the tariffs, stating he "won't relent until tariffs are removed," reflecting Canada's unwillingness to concede to U.S. pressure. Trudeau's administration has faced significant scrutiny and turmoil over economic policies, particularly concerning tariffs, after announcing he would be resigning amid this pressure, with his party's suspension set for March 24.
Editor-in-Chief of MeidasTouch, Ron Filipkowski, expressed his views via social media, commenting, "The Trump Trade War begins. I see Elon Musk negotiated China’s tariffs down. Already coming through for his largest business partner." He pointed to the Dow Jones's immediate decline following the tariff announcement, showcasing investor apprehensions.
The forthcoming tariffs will undoubtedly provoke complex economic dislocations as businesses and consumers adjust to new pricing dynamics. Market analysts are already forecasting sluggish economic performance due to the threat of increased consumer costs. The administration’s dual goal of maintaining economic growth through tax cuts and fiscal measures, alongside generating revenue through tariffs, poses challenges for sound policy making.
This balance of needs and economic philosophy will likely lead to contentious discussions around trade deals and domestic economic strategy going forward. Investors and economic analysts will have to remain vigilant as these policies evolve, especially during the delicate transition phase between tax reforms and regulatory changes.