Evolving Tariff Policy Has Benefits, but Changes Are Pushing Investors to Sidelines
There are some stark differences between tariff policy under Trump 1.0 and now under 2.0.
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Every new tidbit around evolving tariff policies continues to drive the bulk of market action. That is likely to remain the case in the near term, especially as full reciprocal tariffs are fast oncoming.
There is a different feel and angst to the slew of tariffs unleashed by the new administration compared to their iteration in the first term of the current POTUS. Markets are also in a different place than they were in 2018.
First, it should be acknowledged that the globalization of the previous decades has provided both benefits and has had its downsides as well, especially since China was fully welcomed into the global trading community at the turn of this century. Outsourcing certainly has fattened the profit margins for myriad American multi-national concerns over the years. Consumers have benefited from lower prices and a wider variety of goods to choose from as well.
However, there have been some considerable negatives to this accelerated globalization as well.
As Jim Cramer noted on CNBC this week, "free trade" has destroyed many small towns across the country. Increased globalization has also hallowed out a good chunk of the nation’s manufacturing capacity and elongated supply chains. For example, the U.S. now has less than a quarter of 1% of the global shipbuilding capacity while China has captured more than half of globe’s tonnage put on the water. This obviously has strategic and geopolitical implications. The U.S.’s over-decade long desire to "pivot" its armed forces projection to Asia depends on the ability to modernize and expand the U.S. Navy. — something that cannot be done domestically at the moment. The nation is a long way from the time it could build a Liberty ship in three days.
The markets are also different than they were in 2018. The S&P 500 was trading at just over two-times revenues during the tariff push of seven years ago. The index now fetches roughly three-times revenues, and its P/E ratio valuation is some 15% higher as well. Federal debt has also soared from just over $20 trillion then to more than $35 trillion now. Interest payments to service that debt are now a bigger line item within the federal budget than defense outlays.
The administration is also pushing new tariffs much earlier into their second term than they did during the first term. To be frank, the POTUS has come out a guns blazing. Tariffs are much more central to economic policies and appear to be much more encompassing. The administration is no longer primarily targeting just China. This has resulted in some early victories as far as getting more capital investment into the United States. Hyundai just announced it is going to allocate an additional $21 billion to building manufacturing capacity in the U.S. over the new few years.
Unfortunately, the evolving tariff policies of the United States is increasing uncertainty in the business community as it is very difficult to make capital decisions when the lay of the land is this unstable. With tariffs now much more encompassing than they were in 2018, this disruption could easily help lead to an economic contraction over the near term. It makes investing in the markets much messier as well.
All an investor can do is remain prudent and patient as this new paradigm evolves and defines itself better in the quarters ahead.
At the time of publication, Jensen had no positions in any securities mentioned.
