Berkshire Hathaway’s legendary CEO Warren Buffett says that tariffs are an “act of war” that could further worsen inflation. After a blitz of information in recent weeks, it seems that the market agrees, with stocks falling again Monday.
After the election, pundits were awash in reasons why investors shouldn’t worry that President Donald Trump meant what he said. They argued instead that his administration would be marked only by growth-spurring initiatives such as regulatory rollbacks and that it would not be hamstrung by things such as trade wars. Now that it’s clear that that’s not the case with key parts of his agenda—such as tariffs—the market is back to the level it was at in early November, erasing its post-election gains.
“From my lens, the Trump honeymoon period with the markets is over,” writes Rosenberg Research’s Dave Rosenberg, noting that only 8% of S&P 500 stocks are at new 52-week highs, far below the 25% that were at that peak in early November. “The major averages have now done nothing since Election Day, which is a far cry from the powerful and ongoing risk-on response at this same stage in Trump 1.0….The U.S. economy, instead of speeding up, is slowing down.”
This might not be surprising to anyone who remembers far back into the mists of time, to the year of 2018, when tariff uncertainty was a leading cause of the S&P 500’s decline during Trump’s first administration. More recently, Barron’s warned in December that stocks might struggle after Inauguration Day, when hopes met reality. It appears that the market is just coming to grips with the latter after the S&P 500 recorded a painful February.
“The apparently measured start to Trump 2.0 tariff diplomacy featuring easy wins, delayed implementation and a soft approach on China fuelled investor complacency that there would be negotiated settlements in place of the aggressive tariffs threatened during the election campaign,” notes TS Lombard’s Jon Harrison. “Last week’s, at times chaotic, tariff and trade related news flow marked an end to complacency.”
The White House’s decision to impose an additional 10% tariff on China and move forward with 25% tariffs on Mexico and Canada fully deflated hopes that there wouldn’t be much trade disruption, and it forces the market to take other levies, such as the 25% threatened against the European Union, more seriously.
Nor does it seem like there is an easy path toward concessions, particularly when it comes to China, given that Trump has also told the Committee on Foreign Investment in the United States to thoroughly scrutinize Chinese investments in certain sectors. “Other measures announced could reopen previously settled issues including adherence to accounting standards and stronger enforcement of rules on US listings for Chinese companies,” writes Harrison. “China has said it will retaliate against both these measures as well as to the tariffs.”
The upshot is that markets will have to live with the seesaw of trade talks for the foreseeable future, even as other data shake confidence in the economy.
“Continuous negotiations on Trade War 2.0 and the uncertainty alone are headwinds to the S&P 500,” argues Evercore ISI’s Julian Emanuel. So called soft-data points, such as consumer confidence, are flashing yellow as shoppers pull back in the face of persistent inflation and mass government layoffs, threatening economic growth. Meanwhile, last week’s increase in jobless claims was the “first crack in the ‘hard data’ ” about the economy’s health, Emanuel notes.
In short, factors are aligning at the worst time.
“Trade policy that creates a consumer demand shock—assuming the current threats are implemented—at a time when US economic growth is already slowing increases the odds of a negative feedback loop developing in the economy,” writes 22V Research’s Dennis DeBusschere.
Still, investors don’t necessarily need to give up on U.S. stocks entirely. Yes, it appears that volatility will remain the name of the game as long as tariff uncertainty remains, but while the S&P 500 might have further to fall in the coming months, Evercore’s Emanuel believes that it can still end the year higher, to the tune of 6,800. Barron’s, too, thinks that ultimately it will be an up year for the index.
DataTrek’s Nicholas Colas thinks it’s wise to take the longer view, too, even as he sees more choppiness to come. “[I]t is important to remember that ‘American exceptionalism’ with respect to equity price performance is a relative/longer run concept and does not assure the S&P 500 will beat all comers over any given quarter,” he writes. “Given the combination of lofty expectations and manifold policy uncertainty, US stocks are holding up remarkably well.”
That may be the case, although to borrow Buffett’s analogy, that doesn’t mean they won’t take a beating and further retrench before recovering. War—what is it good for?
Write to Teresa Rivas at teresa.rivas@barrons.com
