anticipation: The Upsurge in Trump's Stock Market is at Risk due to this Straightforward Factor
Soaring high and reaching new heights, that's been the vibe for the stock market this year. The bull market hit another gear following Donald Trump's election as the next president last week.
But you know how it goes with movies, when everything is going too good, disaster is just around the corner. While real life isn't always like a movie, Wall Street might be in for a cinematic experience.
I'm calling it, the Trump stock market surge is going to crash. Why? One straightforward reason:
Tumbling dominoes
I think the Trump stock market surge will hit a wall because of Trump himself. More specifically, stocks will take a hit (eventually) due to Trump's customs duties. The president-elect has pledged to impose 10% to 20% customs duties on all imports into the U.S., and he wants 60% to 100% tariffs on all Chinese imports.
The stock market may not immediately screech to a halt after customs duties are introduced. But almost immediately after across-the-board customs duties are imposed, the cost of many items American consumers purchase will significantly increase.
Countries that export items to the U.S. won't pay customs duties; U.S. companies that import these products will. These companies will probably absorb some or all of the extra costs, but many will pass them on to their customers instead.
Couldn't customers switch to American-made products instead? It's true for some products, but not all. Also, American companies will likely increase their prices, too.
Picture this: You run an American company selling gadgets for $100. If the gadgets manufactured by your main competitor, a foreign company, suddenly cost customers $120, it would be pretty tempting for you to also increase the price of your gadgets, say, to $115. You'll still have a lower price than your competition, but you can boost your revenue significantly.
Custom duties will likely result in higher inflation. The Federal Reserve might not continue reducing interest rates when inflation rears its head again and could even raise interest rates once more. Consumers might even cut back on their spending due to the sudden increase in prices. The situation would worsen if other countries retaliate by imposing their own customs duties and ignite a full-blown trade war that harms U.S. exporters.
Imagine a line of dominoes. The first one, labeled "customs duties," tumbles down, knocking down the second domino labeled "inflation." This domino falls down the next in line with "interest rates" printed on it. The final domino that falls represents the stock market.
The weak spot of this prediction
The domino analogy reveals the hidden flaw of my prediction. All the dominoes won't fall if the first domino doesn't knock down the second. I'm assuming the current stock market surge is doomed because President-elect Trump will carry out the customs duties he has promised to impose – but it's possible he won't.
Businesses will likely lobby hard to persuade Trump to delay his customs duties. Countries that trade with the U.S. will probably attempt to avoid damaging customs duties that could negatively impact their economies.
Another scenario is that Trump's customs duties are implemented, but with lots of loopholes. If there are enough exemptions for specific countries and/or products, the overall impact of the customs duties could be much lower than anticipated. Also, Trump could put the full-blown customs duties into place but then lift them quickly enough to avoid causing significant damage.
What should investors do?
Suppose Trump sticks to his promises and introduces large-scale customs duties. What should investors do? The straightforward answer is the most logical one: Invest for the long-term.
Warren Buffett once said, "If you aren't willing to own a stock for 10 years, don't even think about owning it for 10 minutes." Buy stocks that pass the Buffett test. And if you need your money in less than 10 years, stocks might not be your safest bet, anyway.
The truth is that all stock market surges are doomed to end at some point. But if you're a long-term investor, you know there will be more surges to come.
The implementing of customs duties by President-elect Trump could lead to an increase in inflation due to higher prices of imported goods. This could potentially prompt the Federal Reserve to reconsider its interest rate policies and consumers to reduce their spending.
Investors who believe in President-elect Trump's commitment to customs duties might consider investing for the long-term, adhering to Warren Buffett's advice of investing in stocks that can withstand a 10-year test.
