Stocks Pricing in ‘Trump Trade Spat’ Uncertainties
It’s generally advisable for investors to be long-term bullish because the average bull market has lasted longer than the average bear market over time, and because average bull market gains have exceeded average bear market losses. As famed investor, Sir John Templeton, wisely advised, “Never stay bearish too long”. That said, certain drawdowns occur which require heightened capital discipline by the investor, in the absence of which great financial pain may be administered. What are the risks and probabilities of what is now an escalating ‘trade spat’, and how might these risks be mitigated?
The risks include:
Widespread fretting over tariff-related uncertainty in impacted industries. This week the Federal Reserve Bank of Dallas shared survey results of 25 American energy companies, every one of which expressed tariff fretting.¹ Following new auto tariffs and the associated drop in stock prices, U.S. auto executives likely joined the gloom this week. Even consumer sentiment is reported to be taking a hit. Universally dismal sentiment can become a self-fulfilling economic prophecy.
The immediate inflationary price increases resulting from new tariffs. One energy executive from the Dallas Fed survey said, “The administration's tariffs immediately increased the cost of our casing and tubing by 25 percent even though inventory costs our pipe brokers less, and U.S. tubular manufacturers immediately raised their prices to reflect the anticipated tariffs on steel”.²
Inflationary pressure means higher interest rates, which reduces consumer spending, which lowers economic activity, which reduces corporate earnings and causes job losses. A full-blown trade war can quickly introduce stagflation, or high inflation in a stagnant economy with high unemployment.
The S&P 500 entered ‘Trump’s Trade Spat’ from historically lofty valuations and is now pricing-in tariff risks. It’s been reported retail investors, the worst on earth, are ‘buying the dip’ while savvy institutional investors are ‘selling the rally’ hand over fist.³ The S&P 500 is below the 200 DMA and is in a technically vulnerable position.
The probability these risks will derail the economy and introduce a bear market recession are challenging to discern. Will President Trump get the concessions he wants, put a halt on tariffs, and avert a trade war? If not, won’t he look weak and foolish pulling back without benefit? Might he push the issue without resolution, single-handedly ushering in a global bear market recession and causing financial hardship to potentially millions of people?
As investors, it seems to me we’ll be wise to recognize three things: 1) a trade war can potentially burn our economic house down and murder the bull market, 2) this may or may not happen, and 3) market participants are pricing in this new risk.
Prudent responses might include:
Focus on high quality businesses least likely to experience tariff-related price increases, and businesses easily able to pass price increases on to consumers.
Consider adding an inflation hedge or two to your portfolio.
Raise some cash and reduce risk in your portfolio by slimming highly inflated and highly exposed positions.
Increase holdings in defensive sectors with lower valuations and more reliable earnings.
Place a higher value on income today than the promise of income tomorrow. Reinvest investment income to compound returns over time.
Think about it, Shaun.
“Give a portion to seven, or even to eight, for you know not what disaster may happen on earth”. ~Ecclesiastes 11:2
1,2 Stansberry Research, “The Stansberry Digest”, March 27, 2025
3 Bloomberg, “Retail Investors Are Buying the Dip as Stocks Slide”, March 28, 2025 https://www.bloomberg.com/news/newsletters/2025-03-21/retail-investors-are-buying-the-dip-as-stocks-slide
The opinions voiced in this material are general and are not intended to provide specific recommendations. The economic forecasts set forth in this commentary may not develop as predicted. Dividends are not guaranteed, can stop at any time, and will not necessarily enhance investment performance or returns.
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