T-Day is Here: Trump’s Tariffs and the Market Fallout

The ghosts of the 2018 trade war are back. With new tariffs kicking in today, here’s what it means for markets and your wallet.

KEY TAKEAWAYS

• Trump’s new tariffs (25% on Mexican/Canadian imports, 10% additional on Chinese goods) are officially in place today.
• Tariffs are a direct tax on US companies that import goods—not on foreign governments. Costs will be passed to consumers.
• The goal is to shift demand to domestic suppliers, but that only works for goods with viable US substitutes.
• China and Canada have already retaliated with their own counter-tariffs on US goods. Mexico is getting its response ready.
• Markets were betting Trump would delay the tariffs—he didn’t. Now, uncertainty is rising, the Fed is on edge, and “stagflation” is a growing concern.

MY HOT TAKES

• If you own a stock in a company that won’t pass on these cost increases, sell it immediately—it’s not maximizing profits for you.
• The best-case scenario? Consumers still pay more. The worst case? Economic slowdown, inflation, and a recession.
• Retaliatory tariffs have a history—just ask US soybean farmers from 2018. Expect similar fallout now.
• Markets are already pricing in multiple Fed rate cuts. That tells you all you need to know about the economic risks ahead.
• If you thought inflation was cooling off, think again—this will hit prices fast.
  
  

They’re here. If you are of a certain age–sorry zillenials (that’s a mash up between millennials and Gen-Z)–that line will send shutters down your spine. That’s right, the line is from the 1980s horror film Poltergeist. While I am not writing about that iconic film of my earlier years, there are some similarities between the film and today’s spooky market. Not unlike the ghosts of the past that haunted the Freeling family in Steven Spielberg’s film, the ghosts of President Trump’s 2018 tariff-induced trade war are now haunting markets.

Candidate Trump promised them and said they would be big. He delivered them less than two weeks into his presidency, he temporarily halted them, and today, they become a reality. And they are indeed big. Yes, folks it’s T-Day! Today Canadian and Mexican imports will now be assessed a 25% tariff, with the exception of energy products from Canada, which will be taxed at 10%. Chinese imports will be taxed another 10% on top of the existing 10% tariff starting today as well.

I have been quite vocal against the tariffs, though I cannot argue with the administration’s goals. Using them as bargaining tools is one thing and actually putting them in place another thing altogether. I want to make a few things clear… AGAIN, before we begin. 1) Tariffs are charged to the importing company (eg. Target, Apple, Tesla, Walmart, General Motors, Kroger, Dole, Del Monte, etc). Tariffs are NOT CHARGED TO FOREIGN GOVERNMENTS. 2) Increases in costs will be passed on to consumers. If you own a stock in a company that does not pass the cost increase to its customers, sell it immediately—it is not maximizing profits for shareholders! That means exactly as it is written–you and I as consumers will pay more for tariffed products soon after today. You don’t believe me? Just watch banana, avocado, and berries prices going forward. 

So why would someone do such a thing? What is the goal? Well, if prices go up, retailers and consumers will seek cheaper suppliers and substitutes. If there are domestic producers that charge less than the imported product plus 25%, it’s a win. Domestic producers will get the business. Consumers will still pay more, but maybe somewhere in their hearts or brains (who knows which), they can feel good about it because they are buying local. ‘MERICA! 👊 If that is the goal, then mission accomplished.

Now, as you might guess, the tariffed country loses the business to domestic producers. The producers may be forced to eat into their margins and cut costs to win back the business. In that case, it is possible that the consumer (you and I) will only pay for the portion of the tariff not eaten by the foreign supplier. Still bad but slightly better.

There is another potential side effect being touted by administration officials. In this scenario where retailers and consumers switch to domestic producers or non-tariffed suppliers, the tariffed countries' currencies will weaken as demand declines. A weaker foreign currency means the US Dollar can buy more foreign stuff, which may also help to weaken the price hikes to consumers.

So, in a best-case scenario, some foreign suppliers will bear some of the tariff, a stronger Dollar will ease some of the tariff, and demand will shift to local producers. BUT you will still pay more for those goods. That is the best case, sorry! Folks, all non-radicalized economists agree that tariffs are a tax on domestic consumers. Oh, and if you didn’t know, tariffs did cause prices to rise in 2018. In 2018 we were at or below the target with Fed Funds at lower levels (though they were on the rise in 2018). Today, I can assure you that price increases will be felt more acutely.

Now, we haven’t yet talked about counter-tariffs. That’s right you don’t expect those targeted countries to just take these lying down. Do you remember when China placed tariffs on US soybean exports? In response to US sanctions, China exacted a 25% tariff on soybeans in April of 2018 and completely cut purchases of US soybeans in the summer of that year. Chinese buyers switched to Brazilian suppliers. Because of the massive demand decline, soybean prices fell to a 10-year low, leaving US farmers in the… well, dust. It was not just farmers that struggled. Any public company supplying to farmers took a hit as well, as orders tanked. And it was not just soybeans. China’s retaliatory tariffs were also levied on American pork, corn, wheat, dairy products, nuts, and fruits… oh, and don’t forget lobsters. 🦞 This forced the administration to spend some $28 billion to bail out farmers in 2019. All this was in response to the US imposing a 25% tariff on only $50 billion worth of imports from China. Today’s blanket tariffs are clearly much larger in scope, and China has already responded.

In response to T-Day, China has announced a 15% tariff on all US chicken, wheat, corn, and cotton. Additionally, a 10% tariff will be charged on sorghum, soybeans, pork, beef, and seafood. Similarly, Canada has announced 25% counter-tariffs on around $150 billion of US imports (liquor, vegetables, clothing, shoes, perfume, appliances, furniture, and sports equipment, to name a few) in two waves, and Mexico is expected to launch its own countermeasures later today.

Now, let’s go back to the administration’s noble causes for this newly emerging trade war. Causing demand to shift to the US can be a positive, but it will only work if the products being affected are highly elastic and have similar domestic substitutes. Have you ever made guacamole using a California avocado? Sorry Cali, we still love you… for other stuff like grapes, garlic, almonds, and lettuce. But there are things that can be substituted, though at a cost of convenience and… er, dollars. For example, you can buy domestically grown raspberries, but they will cost you more, and they won't be available all year.

Did I even mention the effect that this might have on US companies… whose stocks we are all invested in? Do you know that most iPhones are made in China? Now, of course Apple can switch production to the US and other foreign alternatives, but switching up a supply chain doesn’t happen overnight, and it certainly does not happen without costs. Who, my friends, do you think will pay for that?

So, what does all this scary stuff mean to us? Well, up until yesterday, the markets apparently were counting on Trump kicking the can down the road. In other words, the markets did not expect these tariffs to actually kick in. Now, I do believe that some of this was already priced into the markets, but a big factor remains of the unknowns, which have become a hallmark of the Administration. 

It is clear that Trump is serious, so we had better take notice. Will these tariffs stand long enough to affect prices? Will all this worry continue to decay consumer confidence and consumption to the point where a recession may ensue? What about the Fed? Well, the folks over at the Big Bank are certainly nervous right now. They know that inflation results from tariffs, and they also know that declines in confidence and consumption causes economic declines. 

Several weeks ago, I wrote about the potential for stagflation, which is a period of high inflation compounded by economic decline. On the same day I wrote those words in my market note, I received several press inquiries from major news outlets asking for a clarification– I obliged. Today, you will hear stagflation mentioned all over the mainstream media–just watch. Also, markets are now pricing in a 100% chance for a 25 basis-point cut in Fed Funds by June, with another 50 basis points by the end of the year. Just days ago, there was only a small chance of a single 25 basis-point cut by the end of the year. How will the pricey equity markets react? I think you know the answer to that. I have already seen the word “Trumpcession” show up in more than one place. I didn’t write it, but it’s out there. Get your hardhats ready. 

YESTERDAY’S MARKETS

Stocks were trampled by Trump’s late-day comments that tariffs against Canada, Mexico, and China that were locked and loaded would, in fact, be fired down range today– T Day. Earlier in the day the Institute for Supply Management (ISM) released its influential manufacturing PMI that slipped closer to contraction than expected due to a decline in orders. Stocks didn’t even have a chance, bond yields declined on increased recession fears, inflation, and flight to quality.

NEXT UP

• No major economic releases today.
• New York Fed John Williams will speak today.
• Important earnings announcements today: Best Buy, AutoZone, Target, CrowdStrike, and Ross Stores.

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