Author: Adam Phillips
On Thursday, President Trump signed two proclamations aimed at furthering the Administration’s “America First” agenda by imposing tariffs on steel and aluminum imports of 25% and 10%, respectively. The tariffs were signed using authority provided under Section 232 of the Trade Expansion Act, which allows the President to issue tariffs if he feels existing policies pose a threat to national security.
While these tariffs are likely to help a small subset of the businesses in the U.S., it is hard to see the benefits for the broader economy. In fact, it is estimated that roughly 80 times more Americans work in businesses that consume steel (e.g. auto manufacturers) than produce steel. Therefore, recent actions could actually lead to higher costs for U.S. companies if foreign steel producers pass on their tariffs to U.S. buyers in the form of higher prices.
In general, protectionist trade policies are difficult to justify from an economic standpoint. The most recent example of such policies in the U.S. came in 2002 when the Bush Administration imposed tariffs of 30% on steel. These tariffs would be repealed less than two years later, but not before contributing to a selloff in equities and a decline in the U.S. dollar as other countries threatened retaliatory action.
Yesterday’s announcement merely provides us with one more geopolitical event to monitor. Fortunately, Canada and Mexico will be exempt while NAFTA negotiations are ongoing. However, other major trade partners will not be so lucky, and time will tell how they choose to respond to the news. Europe has already threatened retaliatory tariffs on Harley Davidson and bourbon, which would hit home for key Republican figures, House Speaker Paul Ryan (Wisconsin) and Senate Majority Leader Mitch McConnell (Kentucky). However, it is too early to know what impact this will have on the economy or market returns over the longer-term.
Amid the media noise, investors should not lose sight of the fact that most major market drivers such as employment, consumer confidence, and corporate earnings data remain favorable. Friday’s 1.5% gain in stocks was likely more a reflection of the stronger-than-expected February jobs report (313,000 jobs added, the highest since July 2016) than the market’s approval of these new trade policies.
Within our Overweight allocation to equities, we have been more heavily invested in smaller companies whose U.S.-centric operations leave them relatively insulated from risks associated with trade and exchange rates. Since the beginning of March, this stance has benefitted EP Wealth client portfolios, with small cap stocks outperforming their larger counterparts by roughly 2% as trade concerns have swirled.
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