Trump's Tariffs and the Financial Markets
There’s a well-known maxim in the markets – "Sell the rumour, buy the fact" – a belief that market expectations can often be worse than reality. However, in the case of last week's US tariff announcement, the outcome was much more significant than anticipated, leading to increased volatility across global markets.
Yes, Equities have taken a steep hit but to soften the blow, government bond yields and the Australian dollar have trended lower, which has been a positive for defensive bond assets and has insulated global holdings to a degree. This is a strong reminder of the importance of diversification and maintaining a margin of safety in your investment strategy.
While the proposed tariffs will undeniably have significant implications for global trade, economic growth, and inflation, it’s important to note that this is likely an initial “deal making” step only in the Trump Administration’s aim to rebalance what they view as an unfair global trade system.
Going by Trump’s track record, there is a strong possibility that he is front-loading very high tariff rates as part of a dangerous negotiating tactic!
There will now be a round of reciprocal tariff negotiations, and this will likely play out with a lot of posturing amongst global political leaders. Yes, the media will have an absolute field day!
We understand that this can be unsettling however we suggest that you stay focused on your strategic plan in volatile times.
Pat Kelly, Financial Adviser
Volatility, as always, can create attractive entry points for quality assets, especially for investors with a medium- to long-term time horizon.
What we know about the Tariffs.
The US announced a set of "reciprocal tariffs" on a range of countries, based on what it believes to be the effective tariff rates that these nations impose on US goods, including factors like local sales taxes and alleged "currency manipulation."
The rates highlighted are highly questionable and in Australia, with which the US maintains a trade surplus, we will face a 10% tariff (the minimum rate). Goods manufactured in the US are exempt from these tariffs.
There are also some temporary exemptions, including steel and aluminium; automobiles and auto parts already affected by Section 232 tariffs; copper, pharmaceuticals, semiconductors, and lumber; and bullion, energy, and minerals not readily available in the US.
What we don’t know.
While President Trump did not provide a definitive timeline for the duration of these tariffs, he is posturing that they could remain in place indefinitely.
This remains to be seen and will no doubt be impacted by potential legal challenges and the outcome of how the affected countries will respond.
Potential scenarios include retaliating by raising tariffs on US goods, prompting further US tariff increases. Another could see countries seeking to lower tariffs on US exports in exchange for concessions on their goods.
At this point, the situation remains fluid and subject to change.
Initial market reactions and potential ramifications.
US and global stocks have experienced a sharp decline with the broad-based US S&P500 Index retreating 10.50% over last Thursday and Friday.
Unsurprisingly, US companies reliant on imported goods were among the hardest hit, including well known multinationals like Apple (-15%), Nike (-12.3%) and Amazon (-12.75%).
The US market closed flat overnight, after a volatile trading session to start the week. The Australian share market has also experience steep falls over the past week.
As a result of these changes, consumers in the US may face higher prices, at least in the short- to medium-term.
Further, global GDP growth could be stifled as businesses defer making any significant investment decisions and consumers pull back on spending. Company profit margins may come under pressure from increased costs, not passed onto the end consumer.
That said, economics is rarely so straightforward. There are several factors that could offset these challenges, along with the potential for tariff rates to be decreased via trade negotiations. For example, the US might respond with fiscal stimulus measures, such as additional tax cuts, to support the economy.
Furthermore, the tariffs could accelerate the "reshoring and friend shoring" of US manufacturing. The impact on markets and sentiment may also have an impact on future US Federal Reserve policy.
The tariff news could potentially shift the Fed’s focus from inflation concerns to economic weakness. If this occurs, the Fed and the Reserve Bank of Australia may decide to resume interest rate cuts sooner than previously anticipated. This is a counter measure that can stimulate activity in challenging times.
The oil price has retreated significantly over the past few days (which can reduce input costs) and China may decide to offload surplus goods to other markets like Australia (cheaper goods for us)!
What should you do?
It rarely pays to make knee jerk investing decisions post steep, policy induced share market declines. Investing in equities is an investment in Real Assets! Real businesses with the ability to be agile and adapt to changing market conditions.
Market volatility, particularly in reaction to policy shifts like tariff announcements, is a timely reminder of the crucial role portfolio diversification plays in mitigating risk. While short-term fluctuations are inevitable, a diversified portfolio can help smooth out the bumps and provide stability during periods of uncertainty.
Like any other case of market volatility, we encourage a long-term view, understanding that market turbulence is a feature, not a bug, of investing.
It’s also important to take a breath, and remember that this situation will continue to evolve, and we’ll ensure to keep you informed of any future changes.
Questions? Concerns?
If you have any questions or concerns about the impact of the US tariffs on your investments, feel free to reach out to our Financial Advisers through our website or email us at wealth@peakpartnership.com.au