The tariff war begins: ‘extensive, explicit, enforced’

...since the inauguration, investors as well as corporations and small businesses have been dealing with a mountain of uncertainty.

On April 2, Donald Trump threatened to levy tariffs on several nations. This is in addition to the tariffs he has already imposed on China, Mexico, Canada and now global auto producers. The question is whether the “if” in tariffs is still possible.

No, it isn’t. The president is making good on his campaign promises to create an even playing field between the U.S. and our trading partners. Steel, aluminum and the global auto tariffs he recently announced are only the beginning.

Unlike his first term, this time around his tariff initiatives will be “extensive, explicit and enforced,” as one hedge fund manager told me. That will be bad news for the financial markets but there may be a silver lining.

I have often said that markets can absorb and adjust to both good news and bad. If the trends are negative, investors and traders can hedge their portfolios, or move to the sidelines. Good news, as we all know, is much easier. Buy what you can and as much as you can. What the markets cannot deal with is uncertainty.

My readers are old enough to remember the presidential elections. The narrative among financial markets was that the country under Trump’s presidency would mean four years of higher corporate profits, rising stock markets, the end of our debt crisis, and the Ukraine conflict.

Sadly, many investors, traders and company managers focused on the positives but ignored the negatives. The financial markets and many voters bought into the campaign promises of the winning candidate lock, stock and barrel. It is understandable. In populist times like this, hope springs eternal once every four years during presidential elections.

However, since the inauguration, investors as well as corporations and small businesses have been dealing with a mountain of uncertainty. Radical and sudden change will do that to you. Few had done the math on what tariffs or downsizing the government would do to the economy and inflation. How exactly would the president reduce the nation’s debt or end the Ukraine/Russian war, and what would the downside be?

Those issues were dismissed as negotiating tactics or, as part of America’s long tradition of campaign promises, were never meant to be kept. Instead, we discovered that Donald Trump was deadly serious in his intentions to radically transform the nation and its political and economic system quickly. “Burn it all down,” was not just a stump speech.

The changes taking place in downsizing government and reducing the workforce are ongoing. No one, not even the Fed, knows how this will turn out. Uncertainty has become a popular word. Fed Chair Jerome Powell used the word ‘uncertain’ 22 times during his March 19 Federal Open Market Committee meeting remarks.

If you throw in the daily threat of tariffs, you have a perfect storm of uncertainty. Donald Trump’s on-again, off-again, tariffs have left investors uncertain and stressed out with their finger on the buy or sell trigger hourly. That is why the S&P 500 Index is off by more than 10% while markets overall are experiencing 1-2% swings in the averages almost every day.

The announcement of tariffs will remove at least one level of uncertainty from the markets. Of course, that won’t resolve the issue in its entirety, but it might help to calm the markets for a little while — until the next shoe falls.

We do not know what our trading partners will do, or what the U.S. response will be to their reactions. They may retaliate or they may negotiate. In addition, we still need to grapple with the rest of Trump’s initiatives and their impact on the economy, inflation and employment. That can take another 3-6 months.

Unfortunately, after two-plus years of great returns, investors are paying for those gains this year. On June 27, 2024, in my column, “What can investors expect from the coming era of populism” I warned readers that in the last populist era between 1964 and 1982, stocks went nowhere — except in election years.

As for the short-term, I expect more of the same in markets. I predicted a dead cat bounce last week and we got that for two days. However, the auto tariff announcement ended those gains. We could see the market test the March lows before another move-up sometime in April, although once again it would be temporary. Alas, we are Trump-dependent, and he is no friend of the stock market nor are many of his voters. Why would that be the case?

Many of his following have little if any savings and none in the stock market.

In the last election, Trump captured the vote of lower-income household voters who earned $50,000 or less, while those making $100,000 or more voted for Harris.

It seems a safe bet that the stock market is meaningless to many of his supporters, although not all. I would hazard a guess that the stock market rout to them is simply another example of how the deep state works to undermine the president’s initiatives, at least according to the comments I have read from far-right media figures.

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires.