Only One Thing Seems Certain for Investors in New Trump Tariff Reality
The dollar stands to benefit, commodity prices face headwinds and investors can only bank on one thing as President Trump sets policy.
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Investors saw the market take two major hits last week.
On Monday, the NASDAQ cratered over 3% on fears that a startup in China may have found a more effective and less costly way to develop AI models. This put a chink in the AI narrative that has powered so much of the overall gains in equity markets over the past two years. Tech and AI related stocks did a good job recovering from that shock and the NASDAQ managed to cut is losses by just over half by market close on Friday.
The other event that triggered a significant spike in volatility happened late Friday when the new presidential administration announced 25% tariffs on most imports from Mexico and Canada as well as 10% on China. This triggered a 500-point reversal in the Dow in the second half of the trading session Friday to close out the trading week on a sour note. Not surprisingly, both Canada and Mexico have already retaliated with counter tariffs on U.S. exports coming into the prospective countries. This will be a major theme early in this trading week. It also should be noted that some of these additional costs to U.S. imports will be offset by the surge in the dollar, which now trades at its highest level to the Canadian dollar since 2003.
The new POTUS and his administration are likely to continue to be sources of volatility in the coming weeks and months. No one reading this column was alive when the U.S. had a president starting his second non-consecutive term. The first two weeks of the new administration has seen a flurry of executive orders and actions. These have already gutted government DEI programs across the administrative state and have also resulted in dramatic reduction in immigration flows across the U.S. borders. The president’s DOGE initiative has the potential to significantly disrupt how business has been done in Washington, D.C. for generations.
However, it is the administration’s stances on trade policy that are likely to be the primary source for potential market angina in the coming months. Tariffs can be an effective tool and provide leverage to push desired policy changes with both allies and adversaries. The quick and recent reversal of Colombia’s willingness to take back its own deported citizens is one example of this. Unfortunately, they can also lead to counterparty escalation, disruption of global supply chains, higher inflation as well as other unintended impacts.
It is hard to define at this point what the longer-term effects from the beginning of a tariff war could ultimately entail, given one can never know how the skirmish will eventually resolve itself. Are these new tariffs long lasting, or only for short-term leverage to get better trade terms and other policy changes?
Obviously, any firm that gets a large portion of their inputs or goods from tariffed countries would face significant challenges. Homegrown manufacturers would have an advantage. In the short run, tariffs likely mean the dollar will continue to strengthen. This will be a headwind to commodity prices, all things being equal.
In addition, the earnings of American multinationals that get a large portion of their overall sales overseas will see their profits be dinged. One would think small caps that have small global footprints should benefit compared to their larger brethren. However, one thing seems quite likely, and that is that investors should prepare themselves for higher market volatility in the months ahead. It is yet to be determined whether tariffs are now part of diplomacy efforts or a new economic policy.
At the time of publication, Byrne had no positions in any securities mentioned.
