London
UJ
—
Donald Trump has consistently disregarded cautions from various businesses and economists regarding the implementation of tariffs on imports into the U.S. His extensive array of tariffs has severely impacted the stock market and resulted in significant losses for Americans’ retirement savings.
Prior to the 47th President of the United States, there was another blond(e) who showcased a disdain for conventional economic policies, disrupting financial markets. The story of Liz Truss serves as a cautionary tale for Trump.
Just over two years ago, Liz Truss, the then-Prime Minister of the UK, attempted to implement enormous unfunded tax cuts, resulting in a collapse of government bonds before she was compelled to retract her stance. This incident ultimately led to Truss losing her position, making her the UK’s shortest-serving prime minister, having endured fewer days in office than it took for a lettuce to wilt.
Trump’s position seems more stable, as the political systems of the U.S. and UK differ. Furthermore, Trump and his administration have astonished investors with the extent of market hardship they are willing to bear while pursuing their radical economic policies. Nevertheless, analysts caution UJ that this tolerance isn’t boundless.
Investment strategist Ross Mayfield from Baird asserts, “There’s too much wealth tied to the equity market for there not to be a threshold” that could compel Trump to alter his tariff strategy.
“In the end, financial markets reign supreme,” he stated.
Trump believes that tariffs serve as a cure-all for the American economy, proposing they will enhance domestic manufacturing, generate revenue to address the U.S. budget deficit, reduce income taxes, and force concessions from other nations regarding trade and other issues.
However, various businesses and economists contend that tariffs ultimately increase costs for American manufacturers reliant on imported materials and for consumers, while retaliatory tariffs from other nations diminish demand for American goods overseas.
Trump has acknowledged that his tariff strategy may create “a little upheaval” and has refrained from ruling out the possibility of a recession. Recently, Goldman Sachs indicated a 20% likelihood of a downturn in the U.S. within the next year, an increase from the previous 15%. Economists at JPMorgan have also raised the likelihood of a U.S. recession this year to 40% from 30%, attributing part of this increase to the “less business-friendly” policies of the government.
Likewise, investor sentiment has soured.
As of market close on March 14, the S&P 500 index had dropped by 8.2% since its peak on February 19. The Nasdaq Composite, heavily weighted toward technology, has plummeted 12% from its all-time high in December.
The uncertainty surrounding Trump’s tumultuous trade policy further dampens optimism.
Retailer Target (TGT) has recently projected that consumer spending is likely to dwindle due to the ambiguity surrounding tariffs, while Kohl’s (KSS) has reported that economic unpredictability is impacting consumer behavior. Delta Air Lines (DAL) has gone as far as to reduce its earnings forecast due to a decline in both consumer and corporate confidence, which it attributes to mounting macroeconomic uncertainty.
Kevin Gordon, a senior investment strategist at Schwab, remarks that uncertainty “is a deterrent for the business sector, thereby affecting investors as well.” Businesses have reported an inability to devise spending plans due to this uncertainty.
Thus far, Trump appears undeterred by the market’s response.
“The markets will rise and fall, but we must focus on rebuilding our country,” he told reporters on Tuesday.
Paul Donovan, Chief Economist at UBS Global Wealth Management, noted that Trump did not display the same level of indifference during his first term, and this change in demeanor has left investors feeling uneasy.
“Investors anticipated that the negative response from equity investors would prompt some reconsideration of his policy stance,” Donovan explained.
Trump mirrors Liz Truss in some respects.
In September 2022, Truss launched her brief tenure as the UK Prime Minister with a similarly bold economic strategy: cutting taxes by billions and financing these cuts through increased borrowing instead of reducing expenditures.
When she revealed her so-called “mini-budget,” bond investors fled, anxious about the viability of the UK government’s finances. This sell-off in UK bonds, or gilts, escalated mortgage costs and placed some pension funds perilously close to insolvency, prompting intervention from the Bank of England. The ensuing turmoil in the markets eventually compelled Truss to revoke her disastrous plan.
Similar to Truss, Trump may eventually have to concede — a pattern he has shown with some of his policies. For instance, he has retreated from or postponed implementing some of his more extreme proposed tariffs, such as a 60% tariff on all imports from China (which is significantly lower now) and 25% across-the-board duties on Canada and Mexico. Additionally, he reinstated the so-called de minimis rule, permitting packages valued under $800 to enter the U.S. without tariffs.
Donovan from UBS provides insight: “DHL might show up at your home and say, ‘Here’s your product, but first you need to pay $30 to the U.S. government.’”
“In circumstances where trade taxes are clearly evident to voters, President Trump has retreated very swiftly,” he observed.
Conversely, the effects of the 25% tariff on aluminum imports, which enacted this week, may be less noticeable to consumers. Donovan estimates that this added tax might increase the price of a six-pack of beer by just 1.5 cents, or possibly have no effect if the increase is absorbed throughout the supply chain.
Overlooking the market’s reaction to policy decisions is a precarious gamble, particularly since that reaction can influence the broader economy.
Jack Ablin, a founding partner of Cresset Capital, a wealth management firm based in Chicago, argues that the stock market will ultimately be “the final judge” of Trump’s economic policies due to its effect on consumer spending, a crucial economic driver.
Americans observing the decline in their stock holdings and retirement accounts will perceive themselves as less affluent, leading them to cut back on discretionary spending such as vacations and dining out. Consequently, Trump might find it increasingly challenging to disregard the subsequent negative chain reaction on the overall economy.
Mayfield from Baird concurs, highlighting that Trump has numerous mechanisms available to placate investors.
“President Trump can soften his trade and tariff language and concentrate on initiatives that the market would favor, such as tax reductions and deregulation,” he stated. He added that Trump’s endurance with market “pain” — how much disturbance in the market he can tolerate before shifting approach — exceeds what investors had anticipated, yet it has its limits.
Echoing Ablin’s sentiments, he remarked: “I firmly believe that the market serves as the ultimate judge in matters like this.”
Just ask Truss.
