The announcement of import duties as high as 40%+, and double-digit numbers across the giant board held up in the Rose Garden sent the dollar lower, equity markets into the red and pushed gold to a record high on haven demand. A falling dollar would tend to hurt unhedged portfolios with large US denominated holdings. Europe, China, the UK and other global powers are formulating responses, so much of the immediate outlook will depend on whether the tit-for-tat escalates into a global trade war.
Protectionism, history shows, is bad news for growth. Work going all the way back to English economist David Ricardo’s in the 19th century has shown that everyone benefits if countries, companies and individuals focus on their own comparative advantages, relying on trade for everything else.
The upshot in the near-term is market volatility, exacerbating a correction in US stocks that were already on the back foot as optimism over the impact of artificial intelligence faded. The effect on bonds has tended to be more positive, with markets taking the view that rate cuts will be needed, making the current crop of higher-yielding instruments more attractive.
Beyond the immediate reaction, the impact is less certain
The Trumpian playbook characteristically consists of extreme, attention-grabbing announcements, which are subsequently walked back and softened. That approach was seen as much in his first term as it was in negotiations with North American trade partners Mexico and Canada. Hitting the bad news hard, then drip-feeding out the good news can sometimes result in a longer-term tailwind for equities.
As someone who appears to measure his success as 47th President at least as much on the performance of the S&P 500 as on the strength of the US economy, the coming months will offer Trump the temptation of walking back some of the more extreme positions, declaring victory, and watching stocks rally in response.
The bigger question is whether the US economy can withstand the constant threats of disruption. Jobs data, scheduled for release on Friday, will offer an early indication of the relative strength of the consumer.
And the policy response is further unknown. Given that the net impact is higher inflation while damping growth, it’s unclear whether central banks will opt to cut interest rates, or raise them – traders are currently betting on the former.
The White House may also seek to boost spending, limiting the impact on the US economy, though how that would square with Elon Musk’s task of cutting the fiscal deficit is unclear.
Plus we’ve yet to see the full extent of global retaliation to the so-called “reciprocal” tariffs.
The sum of all of this, is that the only certainty is uncertainty
Frankly, at this point, nobody knows which economies will be worst hit by tariffs, whether the dollar will be able to recover, and what the lasting influence will be. And the best answer to such uncertainty remains a globally diversified portfolio, looking through the short-term noise with broad exposure to limit the impact of underperformance in any one sector or geography.
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