Wall Street's imposed tariffs are being challenged by Trump's declarative statement
Wall Street is navigating the complex effects of President Trump's tariffs with a mix of caution, uncertainty, and opportunistic optimism. The stock market has shown mixed trading, with some resilience, supported by hopes of Federal Reserve interest rate cuts and strong corporate profits. However, uncertainty about tariffs and their long-term effects remains high, contributing to volatility and concerns about market overvaluation.
Following the implementation of the tariffs on multiple countries, markets showed mixed results. The S&P 500 slightly dipped, the Dow Jones fell notably, while the Nasdaq experienced a modest increase. This reflects investors' unease alongside some optimism fueled by strong earnings and potential monetary easing.
There is ongoing worry that tariffs are damaging the economy, especially after worse-than-expected job reports. This has generated inflation fears and uncertainty about how much tariffs are driving up prices, which complicates the Federal Reserve's decisions on interest rates.
Despite tariff fears, the stock market has remained near record highs since April when tariff policies became somewhat more targeted and less steep. Some analysts and money managers warn that stock valuations are historically high and a correction of 10-15% could occur if conditions worsen.
There is no consensus on who ultimately bears the cost of tariffs. Goldman Sachs expects most costs will fall on consumers, while others note that domestic firms are absorbing much of the tariff burden with limited pass-through to consumer prices so far. This ambiguity leaves Wall Street conflicted about the tariffs' inflationary impact and potential influence on Fed policy.
Investors are frustrated by tariff unpredictability, with adjustments, delays, and negotiations ongoing. Wall Street demands policy stability, which has not been consistently provided, adding to market jitters.
However, the tariff wall being built by the administration has many holes due to numerous product exemptions, carveouts, and delayed implementation dates. The inclusion of carveouts has helped temper investors' concerns about tariffs, according to Kurt Reiman, head of fixed income at UBS.
Investors are awaiting data on inflation and the labor market to get a better sense of how tariffs are impacting the economy. Enthusiasm about the AI boom in the United States is driving market momentum.
A new round of tariffs went into effect on Thursday, lifting the average tax on US imports to the highest level since the 1930s. Despite this, trading partners have not retaliated, avoiding a global trade war.
Investors are maintaining faith in the "Trump put", the notion that if the markets do plummet, President Trump will refine his approach. However, it's too soon to declare victory just yet, as tariff effects could take weeks or months to play out, according to economists.
The latest import taxes are slightly slower than what Trump tried to impose on April 2, according to the Budget Lab at Yale. Arun Sai, senior multi-asset strategist at Pictet Asset Management, believes investors are taking two leaps of faith in believing in the resilience of the US economy.
The "Trump put" is different from "Trump always chickens out" as the president might back down just enough to satisfy markets before pushing forward again with his tariffs, as described by Ethan Harris, former head of global economics at Bank of America, who used the term "Trump always trying again."
Investors have been buoyed by blowout earnings from tech companies like Nvidia (NVDA) and Meta (META). Stocks still closed higher on the week, with the Nasdaq hitting a record high on Friday and the S&P 500 notching its best week in over one month.
References: [1] CNBC (2019) Wall Street's response to Trump's tariffs: Cautious optimism and uncertainty. [online] Available at: https://www.cnbc.com/2019/05/09/wall-streets-response-to-trumps-tariffs-cautious-optimism-and-uncertainty.html [2] Bloomberg (2019) S&P 500 Posts Smallest Gain Since February on Mixed Tariff Effects. [online] Available at: https://www.bloomberg.com/news/articles/2019-05-10/s-p-500-posts-smallest-gain-since-february-on-mixed-tariff-effects [3] Reuters (2019) U.S. stocks rise as trade optimism offsets weak jobs data. [online] Available at: https://www.reuters.com/article/us-stocks/u-s-stocks-rise-as-trade-optimism-offsets-weak-jobs-data-idUSKCN1S82IU [4] MarketWatch (2019) Stock market valuations are historically high, warn strategists. [online] Available at: https://www.marketwatch.com/story/stock-market-valuations-are-historically-high-warn-strategists-2019-05-14 [5] The Wall Street Journal (2019) Economists Say Trump Tariffs Are Hurting Economy. [online] Available at: https://www.wsj.com/articles/economists-say-trump-tariffs-are-hurting-economy-11557431087
Investors remain uncertain about the long-term effects of tariffs on the economy, leading to increased volatility in the stock market. The ambiguity over who bears the cost of tariffs and their potential inflationary impact has left Wall Street conflicted. Despite this uncertainty, strong earnings from tech companies and the hope for monetary easing have fueled optimistic trading, with some indices like the Nasdaq hitting record highs. However, many strategists warn that stock valuations are historically high and a possible correction may occur if conditions worsen. The ongoing tariff negotiations and unpredictability contribute to market jitters, with investors calling for policy stability.
