MW Markets look past Trump tariffs, but they could be 'life or death' for some companies
By Chris Matthews
Stocks are soaring despite the threat of heavy tariffs
Donald Trump's most consistent policy commitment is to tariffs, or taxes paid by U.S. importers of foreign goods.
During his campaign, he threatened to institute upwards of a 20% tax on all imported goods, with higher levies on goods from China. He has argued this would lead to more production, job creation and wealth creation within U.S. borders.
Economists almost universally disagree, and many financial-market participants have come to believe those tariffs will not be implemented, but will rather be used as a negotiating tool to win concessions.
"People who voted for Trump did not believe him on his tariff promises," Grace Fan, head of global policy research at TS Lombard, said during a Tuesday webinar.
Market action bears out this skepticism. While we are seeing Treasury bond yields BX:TMUBMUSD10Y rise along with the dollar DXY- higher interest rates and a stronger dollar are two expected results of tariffs - we're not seeing tariff expectations manifest themselves explicitly in equity markets.
Barclays equity analyst Venu Krishna said in a recent client note that a scenario where a Trump administration imposes 10% tariffs on all imports, and a 60% tax on those coming from China, would reduce S&P 500 SPX earnings per share by 3.2% in 2025, with another 1.5% hit after U.S. trading partners implement retaliatory tariffs of their own.
The S&P 500 is instead on pace to have its best one-day gain in more than a year, according to Dow Jones Market Data.
Meanwhile, the sectors that Krishna predicted would be most adversely affected by tariffs are also performing well the day after Trump's election.
Those include materials XLB, consumer discretionary XLY, industrials XLI, technology XLK and healthcare XLV, which all have "strong dependency on global supply chains," according to Krishna.
Al of these sectors are on the rise Wednesday, and only materials and healthcare are lagging the broader S&P 500, according to FactSet.
Some analysts believe it makes sense for investors to take a wait-and-see approach on tariffs.
"We believe Trump is serious about tariffs, and he has wide latitude on this front, but our view is that there will be a degree of incrementalism on this front given the economic implications," Issac Boltansky, Washington policy strategist for BTIG, wrote in a Wednesday client note.
"We firmly believe that Trump will be more willing to embrace tariffs in his second term, but we are not yet ready to assume that we will see the universal 10% tariff immediately," he added. "Rather, we see ramping the tariffs on Chinese goods as a logical first step. The escalation from that point is a clear concern that will likely be present for the remainder of his time in office."
Others warn that investors and entrepreneurs should take the threat more seriously, and lawyers and lobbyists in Washington, D.C., are bracing for advocating for their clients on tariff issues as the debate over the new levies gets under way.
Federal agencies will have wide leeway to create exemptions and favorable conditions for certain industries or individual companies.
"All of these present opportunities for interested parties to be involved in the creation of the tariffs, and all of those details could make a life-or-death difference for specific companies or industry sectors as those tariffs get implemented," Josh Zive, an attorney at Bracewell, said during a webinar on Wednesday.
Investors should also look closely at how the second Trump administration will be different from the first.
"When you look at Trump's margin of victory, leading in the popular vote, the second term will have much more of a mandate," Steve Pavlick, a former Trump Treasury official and a policy analyst at Mindset, told MarketWatch. "One of the ideological things Trump feels most strongly about using that mandate is for tariffs."
Pavlick also noted that significant tariffs are being considered as a way to lessen the cost of making Trump's 2017 tax cuts permanent, a move analysts predict could cost nearly $5 trillion over 10 years.
The Tax Foundation, a conservative think tank, estimates a 20% universal tariff would raise $3.8 trillion over 10 years.
But Pavlick notes that tariffs can't be used both as revenue raisers and as negotiating tactics, because if they're being used as a threat to make foreign leaders change policy, the goal is for them not to be implemented.
Jostling within the administration between free-trade advocates and tariff supporters will likely lead to a lot of headline volatility that could move markets, Pavlick warned, while also noting market volatility could motivate Trump to change course on policy.
"Trump will use the stock market and bond market as a scorecard on how he's performing," Pavlick said. "The only thing that's different this time is that he won't be constrained by electoral politics. This time he'll have four years to pursue this, without worrying about pivoting to campaigning."
-Chris Matthews
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
November 06, 2024 14:17 ET (19:17 GMT)
Copyright (c) 2024 Dow Jones & Company, Inc.
Comments