On June 25, 2018, I wrote a note to clients titled: “The 3T’s”: Trump. Tariffs. Trade. and back then, that post covered headlines about trade wars with China and taxes on foreign imports coming into the United States. Man, it feels like it was just yesterday! See how time flies?
Seven years later, here we are again, right? Tariff talk is all the buzz in the media, Trump’s trade rhetoric is shaking up the S&P 500 again, and now we’re all sitting back patiently waiting for our favorite nighttime CNBC special of, “Markets in Turmoil!”.
Like many investors, you may be questioning whether or not the current landscape of President Trump’s second term is any different this time around or if we’re singing the same old song from 2018.
Let’s take a look…
In that 2018 post, I provided some clarity about what tariffs are and the purpose they intend to serve. By definition today, a tariff is, still “a tariff”, and notwithstanding the rendering of opinions coming from the “economic experts” popping up all over the place in the mainstream media and in Washington D.C., tariffs are designed to “level the playing field” of international trade and contain three main goals:
- Protect domestic (American) businesses (especially those that are vital to national security).
- Level out trade barriers set by foreign countries.
- Tighten US trade deficit gaps (increase revenue) wherever possible.
(Source: Brookings Institute)
How did Trump’s trade policies pan out the first time around and what, if any, success was had by imposing tariffs, you ask?
Let’s take the tariffs on aluminum, for example. Back then, that industry faired out pretty well according to Trump’s plans, and by 2019, U.S. aluminum production was on the rise, producers were re-opening shuttered and idled plants to ramp up manufacturing, and companies were investing in American workers by creating high-skilled jobs and gainful employment. The same was true, on the margin for steel manufacturers as more and more hot rolled steel capacity in the U.S. created larger supplies and additional job growth expansion here at home (Source: Reuters).
So, what gives today? Is the tariff landscape better, worse, or the same?
There are two good ways to answer that question. The first is to listen to CEOs of businesses that are squarely in the tariff crosshairs, and the second, of course, would be to measure how the stock market is reacting to all of the tariff chatter.
Let’s start by taking the temperature in corporate America – recently on CNBC’s “Worldwide Exchange”, I watched a Q&A segment between Frank Holland, that show’s anchor, and the CEO of Century Aluminum, Jesse Gary. In that interview, Mr. Gary explained what tariffs will do to the aluminum industry at large here in the United States as well as the impact on his company directly.
According to Mr. Gary, the aluminum industry in the United States has been under threat by China and many other foreign countries for decades now but, putting tariffs on these countries would allow his company a chance to reinvest back into the industry, increase domestic U.S. production, and “probably most importantly”, as CEO Gary put it, bring American jobs back.
He went on to say, “It’s interesting, we’ve been through this before in 2018 when President Trump initially took action to help the steel and aluminum industry and there were a lot of calls that it was going to raise prices but, in actuality we didn’t see price increases, but we did see benefits for domestic industry.”
Coming out of 2018, U.S. aluminum production was up over 40% according to the company’s CEO and, in addition to seeing a similar outcome today, Mr. Gary also announced his company now plans to build a new smelter plant in the United States which would be the first of its kind in nearly 5 decades and will have the capacity to double U.S. production, securing the industry for the “next 50 years.”
(By the way, here’s an interesting sidenote: Did you know that the Biden Administration also raised tariffs on aluminum and steel in 2024 against “primary countries of smelt” in an effort to prevent countries like China from engaging in unfair trade practices by moving imports through other countries such as Mexico, Russia, and Iran? (Source: Husch Blackwell).)
Towards the end of the interview, when pressed on the “double-edged sword” that exists with tariffs and how they may raise business uncertainties causing delays in or cancelling outright corporate capital expenditures, or even worse, invite retaliation from our trade partners, Mr. Gary reiterated his sentiments from 2018 explaining how he didn’t see any slowdowns or inflationary pressure while also saying:
“…well, you know, the U.S. has the lowest tariff rates in the world, so retaliation, to me, seems a bit strange, when we’re already at the lowest rates in the world. So, I’ll leave the diplomacy to the President, but what we’ll do, is do our job and bring on production as is intended [through the use of tariffs].”
Ok, fine, that seems fairly bullish for our economy and, of course, corporations love opportunities for profits and CEOs, like Jesse Gary, will inevitably jump at the chance to be more competitive and grow those profits, but what about investors in capital markets?
How is the stock market reacting here?
As part of the title of this post suggests, Wall Street is throwing a tantrum about tariffs much like it did before. On the very first trading day of 2018, the S&P 500 Index was trading at around 2,695 and as soon as Trump’s bombastic tariff talk took center stage, the Index was more than 100 points lower a month later and despite a desperate attempt to cross the 3,000 mark going into October of 2018, the index fell more than 425 points or 15% going into the end of the year only to finish with a dismal annual loss of 6.24% (Source: Morningstar).
So, NO! Contrary to how some American company executives might feel right now, the stock market doesn’t like it! President Trump and many in his Administration have been ebbing back and forth putting tariffs on, taking them off, putting them on again, then delaying them, and on and on, while many investors are begging for a straight answer AT LEAST!
Mr. President, make up your mind already – investors are exhausted here!!!
The markets today are more impulsive than they have ever been before and, while stock-trading computer algorithms and “zero days to expiration” index options collide into each other, volatility is spiking at every turn and capital markets are listening closely to the President’s words, as his jawboning about tariffing continues to agitate stock prices.
More recently, we have seen U.S. Treasury interest rates plunge while bond prices are on the rise, indicating the possibility of an economic growth scare, or worse, a decline of Gross Domestic Product that may now be occurring in the background here in the U.S.
Meanwhile, market participants are perplexed because they all thought Trump loved the stock market, right? I mean, after all, he has notoriously used the market as his “report card” bragging that his successes will make 401(k) plans richer and greater again. So, does that mean it’s fair now to say that Trump no longer cares about the stock market and your 401(k) plans? Well, of course not. Our President believes that, in the long-term, our country and the U.S. stock market is a great place to invest and grow personal wealth over time – and I agree with that!
So then, why is the President jawing away at this point and what headlines might we be missing here?
While the media is widely consumed with “Trump, Tariffs, and Trade”, there’s a $9 trillion “elephant in the room” that nobody seems to be talking about.
According to U.S. Treasury Secretary, Scott Bessent, in the coming 12-months, $9T of U.S. treasury debt is maturing and, since we surely don’t have the money to pay back borrowers, that debt needs to get rolled over and refinanced. If we listen closely to Mr. Bessent, in order to successfully recast that gigantic wall of debt, we need longer term interest rates to move lower (like they have been over the last few weeks).
How do you control long-term interest rates? Is it through monetary policy, the Federal Reserve, and Chairman, Jerome Powell? Nope, it’s surely not…So what’s the move? You use “rhetorical appeals” to an already slowing economy and shaky markets to prevent massive overheating and slow the pace of inflation. From there, market forces and some uncertainty can drive rates lower making this huge-scale transaction much easier on the Treasury Secretary, but most importantly, on the taxpayer.
This is the “detox” period that Mr. Bessent has been talking about. According to his own projections, we’re hitting the “little disturbance” he explained we have to get through as we transition from an “old guard” government that’s “hooked” on spending, money printing, and the subsequent destruction of middle-class purchasing power, and head back to, we eagerly hope, an economy that can grow organically, stop relying on the government “credit card”, and return back to stable and healthy market conditions.
As we embark on this detox period, contend with mountains of U.S. debt, and digest the current global trade landscape, a balancing act is truly underway and, not surprisingly, the markets are spooked, and volatility is heightened. At Capstone, our investment discipline has been telling us to observe caution, respond responsibly, and while we continue to focus on longer-term growth of portfolios, we are managing risk for clients as needed to get through these times of uncertainty.
If you’re a client of Capstone and have questions about your portfolio, as always, please contact us right away.
If you are not yet a client of ours and, perhaps, are being told to just “ride it out for now”, but you’re genuinely worried about your retirement nest egg and whether it’s being appropriately “risk-managed” or not, call one of our advisors at (888)-587-7526 (toll-free) or (570) 587-7800 (direct) for a free portfolio review and consultation. At Capstone, we don’t charge you just to talk with us!!
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.