Trump Shocks the Market With a Focus on Trade Imbalances, Not Tariff Imbalances
Investors are surprised as the Trump tariff plan primarily focuses on creating new factories rather than creating an equal playing field.
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The market was up nicely at the close on Wednesday and continued to act well as Donald Trump stated that there would be 10% minimum tariffs as well as some reciprocal tariffs. However, it collapsed the moment he held up a chart showing the level of tariffs that were going to be imposed and continued to sell off all day on Thursday.
The problem is that the tariffs that were proposed had more to do with the trade imbalance rather than the tariff imbalance. The market was expecting a plan to equalize tariff rates with the goal of having mutual tariffs of zero, but what it got instead was a plan to drive factory creation in the U.S. by penalizing those countries with the largest trade imbalances.
Equal tariffs are a much easier and faster task to accomplish compared to driving factories to move to the U.S. by imposing financial penalties.
The market was extremely unhappy with this focus and suffered its worst action since the Covid crash in March 2020. The Nasdaq was slammed with a 6% loss, the S&P 500 lost 4.7%, and the DJIA tumbled almost 1,700 points. The Russell 2000 IWM is now down more than 20% from its highs, which is a technical bear market, and the Magnificent Seven MAGS led the slaughter with a loss of 6.8%.
Investors certainly did not expect this approach to tariffs and were not ready for it. In addition, the hope that there will be some quick modifications has not come to fruition. The Trump administration said that they have no plans to change the tariffs. That is probably just a negotiating ploy, but so far, there have been no signs that the tariffs are being restructured.
This is the biggest shift in the global economy in many decades. Changes of this sort are always going to be painful because they come with such high levels of uncertainty. Despite many economists predicting disaster, no one really knows for sure what will happen. At this stage, it appears that no one believes that the Trump economic policy is going to work.
Volatility is going to stay elevated for a while, and the poor technical action is likely to drive more investors to the safety of the sidelines. The primary focus will shift to the economic consequences of the tariffs, which is unknowable at this time.
My best advice is to remain patient with plenty of cash. Don’t worry about trying to predict the ultimate low. Just sit and wait for the price action to improve before you deploy precious capital.
Have a good evening. I’ll see you Friday.
At the time of publication, Rev Shark had no positions in any securities mentioned.
