This week begins with the news that tariffs will be placed on goods coming from Canada, Mexico, and China. Interestingly, China received the best deal of the three, with only a 10% levy. The question now is, “How will markets react?”
We are only a few hours into this new round of tariffs, so it is too soon to tell. However, we have analyzed how markets performed after Trump enacted tariffs during his first term. The data is worth considering as we assess the uncertainty of the current situation.
A Look Back at Tariffs During Trump’s First Term
Here is a quick overview and timeline from Trump’s first term:
- January 22, 2018 – Trump imposes tariffs on all imported washing machines and solar panels—not just those from China.
- March 8, 2018 – Trump orders 25% tariffs on steel imports and 10% on aluminum from all suppliers—not just China.
- April 2, 2018 – China imposes tariffs of up to 25% on 128 U.S. products, including airplanes and soybeans.
- April 3, 2018 – Trump unveils plans for 25% tariffs on about $50 billion of Chinese imports.
- April 4, 2018 – China responds with plans for retaliatory tariffs on about $50 billion of U.S. imports.
- June 15, 2018 – The U.S. announces that 25% levies on $34 billion of Chinese imports will go into effect on July 6, along with 25% tariffs on an additional $16 billion of goods. China responds with tariffs on $34 billion of U.S. goods.
- May 5, 2019 – Trump tweets that he intends to raise tariffs on $200 billion of Chinese goods to 25% on May 10.
Context Matters
Context is important when reflecting on tariffs from Trump’s first term. In his first year as president (2017), the priority was passing tax cuts, not tariffs. This means there was a shock to the system when tariffs were first announced in 2018. Stocks can process good news or bad news, but they struggle with surprises. This time around, tariffs are not a surprise for the markets.
So, if tariffs were a surprise in 2018 and stocks do not perform well in response to surprises, how did stocks react to the tariffs of 2018 and 2019? Did they crash, as many pundits suggest could happen now? Of course, we know they didn’t. Did the economy fall into a depression, as some predict could happen this time? Of course, we know it didn’t—though there was this thing called COVID, but that’s a discussion for another day.
While volatility was elevated during the first round of tariffs, from January 22, 2018, to May 5, 2019, the S&P 500 Index was essentially flat. While a “flat” return over 18 months is not ideal, it does not qualify as a crash or a depression. Does this mean a crash or recession will not happen this time? Of course not—past performance does not predict future results. However, our view is that these tariffs, or even future ones, are unlikely to drive stock prices significantly lower.
The Bigger Picture
The underlying economy remains strong. Over the long term, corporate earnings drive stock prices. While tariffs may impact corporate earnings in the near term, markets do not operate in a vacuum. Business leaders adapt, adjusting to new conditions and finding ways to remain profitable even in difficult environments.
In short, we do not know exactly what the future holds now that tariffs are being implemented—but neither do the so-called “experts” on TV or social media. This means we will remain laser-focused on how markets react, but we will not make impulsive decisions based on every headline or tweet. We expect stock prices to be far more erratic than our investment strategy.
What Really Matters
The bond market, the Federal Reserve, and publicly traded corporations will provide much more insight into the economy’s direction than White House tweets or daytime talk shows. These true economic indicators will be the tea leaves we analyze in the weeks ahead.
Sincerely,
Kessler Investment Group, LLC
All information in this presentation is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. All economic performance data is historical and not indicative of future results. The market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. Certain statements contained within are forward looking statements including, but not limited to, statements that are predictions of or indicate future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties. Please consult your adviser for further information.
Opinions shared in this presentation are not intended to provide specific advice and should not be construed as recommendations for any individual. Please remember that investment decisions should be based on an individual’s goals, time horizon, and tolerance for risk.