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15%+ Tariffs Are Not Reason to Cheer
The market is cheering the “better than feared” trade deals with the likes of Europe and Japan. Yes, 15% is better than 30%. But 30% would be an embargo – not a tariff. 15% will not be good for global trade. Growth will slow; consumption will fall; resulting in fewer jobs. Trump’s terrible tariffs will be at least ~12% more than what we had at the beginning of the year. This consumption tax will need to be paid by someone… just a question of who. The market is not pricing this in….
A Very Complacent Market…
Recent developments in Trump’s draconian trade policies — marked by steep tariffs, fluctuating commodity markets and geopolitical maneuvers — present a highly complex and uncertain landscape. Despite dramatic announcements and headline-grabbing tariff threats, markets have remained oddly resilient, while underlying forces quietly shift. For e.g., Trump’s imposition of steep tariffs—such as 200% on pharmaceuticals and 50% on copper—has less to do with traditional economic rationale and more with political leverage
S&P 500 Hits Stall Speed
Another week comes to close – as we draw near the end of the second quarter. For the past two weeks or so – investors are reluctant to push prices much higher. From mine, the index is not only expensive – trading near a forward price-to-earnings (PE) ratio of 22x – the downside risks don’t handily offset the (possible) upside reward. For eg, it would not surprise me to see the S&P 500 trade up to a zone of 6,200 (adding another 5% or so). However, equally I see a possibility for a 10% to 20% move lower given the risks to earnings growth, inflation (from tariffs), employment and geopolitical tensions.
Powell’s Limited Options
Not for the first time, the Fed is in a very difficult spot. Whilst always a dominant force in global markets, for now, Powell’s team is not in the front seat. We learned this week the direction of U.S. monetary policy (over the coming months) depends heavily on developments well beyond the Fed’s control. And unfortunately for investors – it could be a long (US) summer. In its latest decision, the Fed held rates steady, as expected, citing strong economic activity, low unemployment, and persistent—but slightly elevated—inflation.
For a full list of posts from 2017…