Trump’s reciprocal tariffs appear so ridiculous that one naturally has to believe, “these can’t last forever….he can’t be serious”. Or can he?
The magnitude of these tariffs will not lead to economic growth or stable inflation. It seems antithetical to what the government has been trying to achieve.
The 10% across-the-board tariff is one layer that could perceivably be handled by most businesses and countries. Perhaps these tariffs are made permanent, and in time global commerce will eventually accept these as the new standard of doing business. This would be similar to how the 2018 tariffs on China were left on and eventually absorbed. But it’s the additional tariffs that we have to “hope” will be negotiated down.
If left in place it would not only be bad for the global economy, but we would also consider it to be political suicide. Mid-term elections are 18 months away and last night you already saw key Senate Republicans break rank and voted with the Democrats (51-48) to oppose tariffs on Canada and end Trump’s ability to use “national emergencies” as a weapon. This was a mostly symbolic vote as House Speaker, Mike Johnson, has already moved to prevent a floor vote. That said, this can be considered a meaningful reflection on how the Republican party “really feels”, and that Trump should ultimately lean towards de-escalation.
Israel and India have already bent their knees and offered to drop their tariffs. This should yield concessions and remove or lower tariffs from the US. More countries will likely also yield to Trump and more companies will announce plans to on-shore manufacturing. There should be more than enough “wins” for Trump to boast about. It would be inconceivable that public opinion would remain in favor of Trump if Trump did not lessen his grip when other countries appear willing to find a solution through diplomacy.
Of all the “hopeful” remarks from the more “bullish” research shops like Fundstrat, there are two points I find extremely useful. The first is that 6 nations represent 70% of new tariff dollars. This means that focused negotiations with Canada, Mexico, Japan, South Korea, EU, and China will be more important, and some “key deals” can help defuse most of the pressure. That’s not to say deals with Indonesia and Israel don’t matter, but they aren’t the ones that will move the needle. I also agree with the point that in order to bring out the $6trillion of spending and financing from corporations to fulfill the manufacturing re-build in America, we will need to see stable capital markets to do so. In other words de-escalation is necessary.
All of this is to say, there are many reasons why we should expect cooler heads to prevail. Until then, it will be uncomfortable.
What are we doing?
With the volatility index spiking to 30X, investors have entered the range that would be considered panic. Succumbing to panic rarely lends to successful investing and long term investors have history on their side to suggest that ‘this too shall pass’. Although we do not feel investors should clear the decks, we think it would be prudent to rebalance.
For example, international markets have outperformed the US on a year-to-date basis. Much of the media was previously focused on US trade relations with Canada and Mexico. But with the recent tariff announcement, the narrative now seems to focus more on other countries and regions. Therefore, on a relative basis, Canada and Mexico seem to be in a more favorable position with no “new” tariffs announced. As such, international stocks may be a source of cash as investors look to lock in profits. This may be an opportune time to rebalance back into Canadian equities. After all, this is the right time for the US to prove that the previous trade deals that Trump negotiated (ie. USMCA) will actually be honored!
Most clients are aware that my message has been to remain patient. This is not to say that we simply accept the full market volatility (ie. Beta) We are willing to maintain the target weight of equities but reduce beta by leaning towards less volatile names and sectors. This is the time to look at consumer staples, less trade oriented domestic corporations, increase exposure to dividend yielding stocks, and take a stab at certain stocks that were once believed to be too expensive. We look to raise a little cash, but ultimately want to keep the mix around long-term target levels to ensure we are there for the eventual bounce. And yes, it always does bounce.
