Navigating Tariffs and Deregulation
What happened last week?
The S&P 500, Dow and Nasdaq gained 1.06%, 1.39% and 1.13%, respectively, as President-elect Trump said he would impose 25% tariffs on Mexico and Canada along with another 10% on China his first day in office.
Following a global relief rally on Monday after Trump selected a comparative economic moderate for US Treasury Secretary (Scott Bessent), Trump quickly disabused the notion that a “gradual” imposition of tariffs would take place.
In announcing 25% tariffs on Canada and Mexico on “Day 1” of his new administration and 10% on China “above any additional tariffs,” Trump linked the actions to illicit fentanyl trade and demand for action to stem illegal migration at the US border.
These justifications would appear to help defend against legal challenges to his executive orders. It also opens the tariff issue to negotiation. Trump said the tariffs will remain in effect “until such time” as the illicit drug trade and illegal migration ends.
3 Things to Know
Markets Experiencing Highs and Lows from Trump
Mexico and Canada in particular have strong economic incentives to avoid the imposition of US tariffs. US direct trade with its North American neighbors and China represent about one third of all US trade.
While we’ve explained in the past that tariff collections under Trump in 2018 did little to sway inflation, these initial tariff proposals are ostensibly 10X larger in scope than the actions taken in 2018.
In the three weeks since the US election, vast change has swept across global markets. Expectations and reality almost always differ to varying degrees. Yet we would still trust the wisdom of markets directionally with emerging trends.
Markets might be underestimating the cost of trade friction. On the other hand, we would tend to agree with market optimism over the potential for deregulation to improve the economic outlook.
Cost Impact to US Consumers Isn’t Expected to be Material
Even if there are no exemptions, any actual increase in consumer prices is likely to be far less than a roughly 1% increase that a static analysis would suggest.
Profit margins absorb costs, supply sources change, and there are other coping mechanisms including currency movements and product substitution. The initial calls for tariffs Trump made in social media posts may be negotiated away or more likely expanded to include other economies.
Yet the possibility of greater economic damage is higher than consumer price adjustments might suggest. This is particularly the case if North American supply chains are negatively impacted and production is hindered. One needs to consider the costs of retaliation on US exports as well.
With this in mind, shares in cyclical industries — which rallied sharply on Trump’s election — fell back on his tariff salvo.
Trump Policy Is Likely to Bring About Both Winners and Losers
Looking to Trump administration policies, and even the mere clarity of the Republican sweep, investors see a more certain regulatory environment, one that is less likely to weigh down the risk-taking needed to grow the economy more rapidly.
An obvious boost has occurred in the digital assets realm. Congress and a prospectively-more-friendly regulatory regime have allowed digital assets infrastructure shares to rise 34% since election day. Crypto currency trading volumes have surged. With less competition in the industry, some of the publicly traded marketplace firms still trade far below 2021 levels even with bitcoin making record highs.
A counter example is also notable. Large pharmaceutical providers dependent on vaccines were pummeled when Trump picked Robert F. Kennedy Jr. as his nominee for Secretary of Health and Human Services.
Similarly, US food manufacturers who have been singled out for criticism over processing and unhealthy additives dropped as well. The RFK appointment at the top of the President’s cabinet was a surprise to some given Trump’s deregulatory bend.
Food manufacturers are viewed as a beneficiaries of friendly US regulation. Investors took the news as meaning greater constraints on the industry may be there in the future.
As a deregulation beneficiary, we would instead point to the gas pipeline and LNG export sector. Assuming an agreeable regulatory outlook, proposed North American LNG export capacity is expected to double by 2028. This will support US industrial activity generally while improving the incomes of midstream energy pipelines.
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