Will Trump’s Auto Tariffs Trigger a Trade War?
It is a mess out there. Here's the key issue right now and how I'm approaching things.
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On Wednesday night, President Trump announced tariffs on the auto industry that the market has been anticipating. Automotive stocks are lower on the news, with General Motors GM falling 6% and Ford F down 3% in early Thursday trading, but there has been minimal reaction by the overall market so far.
The key issue now is whether there will be a response by the European Union that develops into a full-blown trade war. Trump promises a very harsh response should retaliatory tariffs be put into place. Barclays says that with the 25% reciprocal tariffs scheduled to go into effect on April 2, the combined tariff could be 40-50% and hit nearly half of the vehicles sold in the U.S.
There is still a tremendous amount of uncertainty about how this will develop, but the market reaction so far indicates that it is hopeful that negotiations will intensify and a solution is found. If these tariffs go into place for the long-term, there could be a complete restructuring of the auto industry worldwide.
Tariffs are currently the most significant source of market distraction, but the Wall Street Journal notes Thursday morning that slower earnings growth and a cooler labor market would likely put pressure on the market anyway. There were signs that consumer discretionary spending was slowing even before the election, and earnings growth is decelerating in nine of 11 S&P 500 sectors.
Market corrections proceed a recession about 50% of the time. So far, there is still optimism that the U.S. can avoid a recession, but the longer this corrective action continues, the greater the likelihood that a recession will develop.
It is a mess out there right now, with both tariff and economic uncertainty at extremely high levels. The problems are reflected in the price action. After the poor action on Wednesday, the indexes are still above the lows hit on March 13, but the odds of a retest have increased. Investors Business Daily has revised its market outlook back to "correction" and suggested market exposure of 0 to 20%.
My game plan is to play defense and trade in very short-term time frames. I have little interest in building longer-term positions until technical conditions improve.
At the time of publication, Rev Shark has no positions in any securities mentioned.
