One conventional wisdom about Trump’s thinking about the trade tariffs which he may (or may) not announce this week, is that Trump’s conviction with the action is directly proportional to the level of the Dow Jones.
Recall that over the weekend, DB’s Alan Ruskin said that “With widespread reports that the President has ignored the advice of leading advisors like Gary Cohn, it has become rational for those who believe in free trade to wish for a sharp decline in the stock market, as something the President may listen to on this issue.”
Further, as we noted yesterday quoting DataTrek’s Nick Colas, “The Achilles Heel for the Dow is clear enough: hurt Boeing by pulling orders (for example), and the Average will suffer disproportionately. And, presumably, President Trump’s affinity for that measure will force him to take notice.”
Then, overnight Bloomberg noted the same:
Donald Trump’s yardstick for his own success is going rogue. That’s the Dow Jones Industrial Average, a regular feature in the U.S. president’s commentary over the past year as the equity bull market raged on. Take early January, when the index sailed past 25,000 for the first time: “This is all about the Make America Great Again agenda! Jobs, Jobs, Jobs. Six trillion dollars in value created!”
Contrast that with now, when the Dow’s being whipsawed by Trump’s own plan to impose tariffs on steel and aluminum imports, and the tweets have dried up. “Dow vigilantes” are signaling their disapproval, according to Ed Yardeni, who coined the term bond vigilantes in 1983 to describe investors who protest monetary or fiscal policies by dumping debt. He says that in relation to Trump and equities, the strategy may have merit.
“The bears could make a comeback if President Donald Trump turns into an outright protectionist,” the founder of his namesake research firm wrote in a note. “More likely is that he will back off if the market continues to react badly to his protectionist pronouncements.”
There’s just one problem with the “Dow Vigilantes” theory: stocks are now well above the level where they were when Trump unveiled the steel and aluminum tariffs. In other words, as Trump has constantly doubled down on his threats that he would impose tariffs, the market’s interpretation of his motives notwithstanding, what he has seen is one day of losses, and both a Friday and Monday where the S&P closed green.
If anything, Trump will see the market – which has already priced in a capitulation by the president – as giving his tariff plan a thumbs up.
Which brings us to another issue noted by Strategas, which notes that President Trump’s Davos and State of the Union speeches both declared that the US was going to fine China for stealing US intellectual property. Those “fines” could be in the hundreds of billions of dollars range and are a much more significant trade event than steel and aluminum tariffs.
Trump himself has also said that the trade wars have one major target: Beijing, with the rest of the world negotiable collateral damage. Just yesterday, the US trade rep made it clear that both Mexico and Canada would get an exemption from the tariffs once they agreed to a “fair” renegotiation of Nafta.
Still, a trade war involving just China and the US is enough to grind global growth to a halt.
And beyond the already announced aluminum and steel tariffs, there is another far more troubling aspect, or rather number, to Trump’s protectionist push noted by Strategas. The number is $1 trillion. Here is strategas:
President Trump is considering imposing tariffs on Chinese goods in response to China stealing US intellectual property. This is often referred to as Section 301 and President Trump specifically mentioned this action in both his Davos and State of the Union speeches. The rumor around DC is that the US will impose $1 trillion of tariffs, which would shock financial markets. We believe the $1 trillion number is too high. Since the US imports $450bn from China, across the board tariffs would need to be 200 percent. Even for Trump that is too much. But given the magnitude of what is being discussed, China would need to respond.
If Strategas is correct, and if Trump’s ultimate intention is to hit China with tariffs in the “hundreds of billions” (or more), it’s on, and the resulting trade wars will promptly cripple all China-facing US corporations first, followed by the rest of the S&P. Here is strategas again on what happens then:
We are often asked which industries and companies would be impacted. There are some obvious sectors such as industrials (cars, planes), agriculture, and technology. Below is a list of US companies which derive the largest percentage of their total revenue from China. We are not saying to short these companies, but believe investors should start thinking about potential risks to the companies they own if they have sufficient business in China.