Liberation Day has arrived – and we can’t say we weren’t warned. But the way forward is still unclear.
Even the most experienced Trump watchers, used to a more rhetoric-driven, flip-flop approach, have been caught on the wrong foot. Knowing the incumbent president’s love of the “art of the deal”, trade rhetoric and executive orders were considered to be pressure tactics to achieve various objectives. But we should not have been surprised: for once, Trump has been surprisingly consistent. Tariffs were an issue on which he ran his election campaign, and tariffs were what we got. What is ironic is the faith in protectionism from a committed capitalist.
Whether this is the beginning of a trade war is matter of much debate and discussion, and depends on the reaction of the countries in the EU and Asia facing the brunt of the tariffs. Various options come to mind, none of them remotely beneficial to the global economy. One potential approach is reminiscent of the period between 2009 and 2011, where economies devalued their currency to maintain their exports, with China being singled out. Another would be a reconfiguration of supply chains and closer cooperation among tariff-hit markets, creating an agglomeration of manufacturing and consuming countries outside the US. Either way, there will be pressure on global growth and prices, leading to a period of uncertainty with respect to interest rates and inflation.
The impact felt at the corporate level will be a more significant factor in either the persistence or abolition of imposed tariffs. The major corporations on the S&P 500 have invested significantly in the economies facing the largest tariffs. Given the ubiquitousness of the silicon chip in all businesses, the tariffs could have a broad impact, but the first-order effects will be felt by companies in the US involved in chip manufacturing or use. These companies have invested heavily in building up manufacturing capabilities in Asia. While the idea behind the tariffs is to stimulate the onshoring of manufacturing and create jobs, the abject reality is that recreating these facilities will take time and investment. Commitments to invest onshore need to be viewed through the prism of return on investment – which does factor in what has already been invested. The result might be serious lobbying from the corporate world for exemptions from tariffs to protect their investments and manufacturing processes. But until these are granted – if indeed they are granted at all – all that remains is uncertainty around future cashflows, which translates into stock price volatility.
For investors, then, anticipate a period of elevated market volatility, which could be sharp or protracted. As with any volatility, the key will be to ride it out, rather than making portfolio decisions on the back of an announcement. As my old mentor used to say, choosing not to act is also an active decision. As the smoke from the opening salvos clears, there will be time to take a more balanced approach to any portfolio changes, based on hard facts rather than on what today feels almost emotional. Right now, it’s more important to follow the tenet our country made famous: “Keep calm and carry on”.
