Tariffs, energy, and immigration: Trump’s inauguration lays the groundwork for potential market volatility. Learn more here.
God, Mom, and… Tariffs. So much for that American classic: Apple Pie. It has nothing to do with miracle weight-loss drugs. No, the world and indeed, even most Americans, were listening to Trump’s every word during yesterday’s Presidential Inauguration hoping to glean any new information on tariffs. YES, tariffs. The very ones that dotted not only most of my last week’s commentary, but those of most of my Wall Street peers.
The long-standing debate on whether or not tariffs are inflationary has already been adjudicated by the markets as being inflationary. This is evident in longer-maturity bond yields which have adjusted in recent weeks to reflect the new administration’s promises of aggressive, across the board tariffs. Reiterating my assertion of last week, markets had, for the most part, factored in a worst-case scenario, assuming the Trump Administration would make good on promises of 60% tariffs on China and a lesser, but still scathing, 25% tax on Canadian and Mexican imports.
The theme here, which will likely continue, is that markets factor in the worst-case scenario, taking the administration’s promises at face value, and then adjusting downward if policies come in short of promises. That seems a sensible thing to do given that equity indexes are still near all-time highs and many stocks are priced to perfection (a Wall Street term for fully valued 😉).
Overall, yesterday’s trio of speeches along with Trump’s general musings can be broken down into several key topics that would have any impacts on the markets, your portfolio, and yes, your life. Here we go!
On tariffs, as aforementioned, markets were factoring in a worst-case scenario with a slight—ever so slight—letup last week, in response to rumors that the administration was potentially considering a more measured approach. Traders were expecting to hear more about China, in particular, yesterday, but were let down. While there was no shortage of rhetoric, there was nothing new to be learned about on Chinese tariffs. The immediate market response could be seen in the US Dollar which declined, indicating that traders were expecting to hear something more scathing, or, as I asserted earlier, markets are adjusting downward from an already-baked-in worst-case scenario. There was some mention about Canadian and Mexican tariffs kicking in on February 1st , but there was deafening silence on Chinese imports.
On illegal immigration, Trump declared an emergency on the Southern border with Mexico, promising immediate action and deportation by the millions. This is not entirely unexpected and was in line with earlier overtures. However, the market has not really factored in any potential impacts of the policy quite yet. It is, indeed, a political third rail, as certain sectors are heavily reliant on immigrant labor, including food services, hospitality, home healthcare, and agriculture, to name but a few. Politics aside, all economists will argue that a decrease in labor supply, tightening of the labor market, will cause labor costs to increase. That will have a direct impact on the bottom line of the affected companies, causing them to raise prices to consumers. Exactly how the Administration deals with deportation in the weeks to come, will provide the markets with the necessary information to adjust. This is one case where the markets have not in my opinion factored in a worst-case scenario, meaning there could be some downside if the enforcement is draconian.
On energy, Trump declared an energy emergency and cried “drill baby drill” in his inaugural speech. While this was music to the ears of some, for many energy insiders it was a painful shriek. Adding energy supply will push prices down. While this is ultimately good for inflation as a whole, and ultimately consumers, it is a problem for energy companies, whose margins will be pressured. It is true that there is “liquid gold” under the US, but even gold is subject to the laws of basic economics… sorry.
On renewable energy, Trump pledged to reverse any green energy initiatives delivered under the Biden Administration, even including credits for purchasing EVs. None of those propositions were a surprise. It would be hard for me to make the case that this was already factored into the market given Tesla’s performance since Trump’s prospects began to climb, however, it was more broadly factored into the markets.
In a similar vein, it was not clear what would be the fate of the Inflation Reduction Act which included many of these clean energy and renewable initiatives. The act also includes many affordability provisions that would have an impact on the Healthcare Sector, which is already under pressure in the markets. This one will have to be a wait-and-see.
On technology, there was not specific mention of it… UNLESS YOU COMPLETELY MISSED Sundar Pichai (Google), Mark Zuckerberg (Meta), Elon Musk (Tesla, SpaceX, X, etc), Tim Cook (Apple), Shou Zi Chew (TikTok), and Sam Altman (OpenAI) all sitting in the VIP section. Despite their recent financial gestures, Trump’s including them in his inner circle, as well as the 75-day reprieve Trump gave to TikTok, shows that Tech will likely have less “friction” under Trump than his predecessor. That can only be positive for the sector that is looking for the next catalyst to revive its momentum.
On crypto, there was surprisingly, nothing at all. Nothing. Nope. 🦗🦗🔇 But there was a pledge to put an American flag on Mars, 🚀 which certainly drew a notable response from Elon Musk, unsurprisingly. You win some, you lose some, I suppose.
Look, there were many other things that occurred yesterday. Trump went through several boxes of Sharpie Markers later in the day. Many of the executive orders were simply memorandums that would still require Congressional support and could potentially have market impacts in the longer term. If you got caught up in the politics you would have walked away expecting sweeping reforms socially and economically, but at the end of the day, the markets were looking for one thing: information on China tariffs; when will they hit, what products will be affected, and by how much. Unfortunately, we got none of that.
There was indeed a sense of relief that we were not hit with anything beyond what was expected, at least for the near term. But it is clear that we can expect much more in the weeks—if not days—if not hours to come. Let me make that clear, it is not over yet, meaning there will be plenty of volatility until each and every promise made on the campaign trail is fully run to ground. For now, the market will have to be satisfied trying to figure out exactly how to handicap the “Golden Age” it was promised.
FRIDAY’S MARKETS
Stocks traded higher on Friday, capping off a positive week filled with market-friendly inflation news. Earnings season has, so far exceeded analysts' targets with Financials and Consumer Discretionary stocks leading the pack—no guarantees that the trend will continue with high bars being set for, specifically Techs, which have yet to announce en masse. Traders awaited, patiently, on seat edges for yesterday’s Presidential Inauguration hoping to get a glimpse of the future from Trump’s speeches.
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