Tariffs Volatility May Increase As Rhetoric Moves To Action

Summary

• Markets have taken a downturn in recent weeks as trade conflicts slowly seem to be edging from mere rhetoric to actual potentially broad policy action with multiple countries.
• Furthermore, what initially seemed like just a temporary state of affairs as some trade agreements were updated now looks like it will be a longer-term massive revision of trade agreements.
• U.S. policymakers also have shaken markets with their statements that they will seemingly tolerate significant shakeups in stocks as they push to achieve their longer-term policy goals.
• Given these new assumptions, markets likely will experience greater volatility than previously expected.
• U.S. markets remain on a strong growth trajectory due to fundamental factors, although the precise entry and exit points will likely be far more essential due to the uncertain nature and length of volatility.

The overall U.S. equities markets were in a steady climb from April to early June as it seems they priced in the tariff rhetoric turbulence and believed it may be more talk than action.

However while relief came slow, worries spiked up quickly again as tensions with Europe have increased and the Trump Administration has said it will press on despite whatever effect on the stock markets its trade battle will have.

Public equity markets have now slumped, giving up much of their gains in June. While I have described previously how markets are on an overall climb that will likely create moderate growth amid some volatility, I think the attitudes of policymakers upgrades the level of volatility we may expect as the duration and intensity of the trade conflict increases.

SPY data by YCharts

Trade War Edges From Rhetoric Towards Action

Despite the turbulent effects on markets and the seeming "new normal" of stagnation this year amidst it, it appears policymakers in the United States remain stern in continuing the trade battle as they seek to create a new series of international deals.

While President Trump described how the governments of other nations were inquiring frequently as to new trade arrangements, given the number and impact of these trade agreements it likely will take a while to make it through all of them under even the most optimistic of circumstances.

In the meantime, U.S. Secretary of Commerce Wilbur Ross says "there’s no bright line level of the stock market that’s going to change policy," meaning that the administration seems willing to tolerate even heavy volatility or downturns at the moment in the stock market in order to achieve its longer-term trade agreement revision goals.

In combination with the lack of any immediate deals seemingly on the horizon, but rather escalation as a battle over European car tariffs now threatens to see tariffs implemented on $300 billion in trade by the European Union, the recent downturn in the markets' brief rally makes sense.

Since these escalated and prolonged tariff predictions came to be around mid-June, the S&P 500 is down now 2.63% from June 11. The markets' rise from its slump during the spring seemed conditioned on the belief that the trade brinkmanship was more rhetoric than actual policy, as well as being resolved in a relatively timely manner.

Events and statements this month by both U.S. and foreign nation policymakers have made both those assumptions seem less likely, creating the valuation reversal.

U.S. Treasury rates also have made a reversal this month from their over five-year high achieved in past weeks. It seems despite a Federal Reserve rate hike in June investors have been seeking bond safety as investors last week pulled the second largest amount of money out of public equities in history and many investors are temporarily pulling out of the market.

10 Year Treasury Rate data by YCharts

Conclusion

I personally remain mildly optimistic on the overall public equity markets, as I believe companies by and large have quite positive growth expectations across the board still due to the strong economy, growing innovation and demand, and the still-moderate levels of impact from oil prices and Federal Reserve rates.

However, based on the past few weeks volatility may well increase significantly if the trade conflicts really do result in large-scale tariffs being implemented, even if only temporarily.

Given how it seems the trade conflict may continue for a while due to the administration digging in its heels about creating new agreements despite the effect on the stock market, corrections may become more frequent as the market tries to price in the possibility that each new tariff implementation will be on the books for an uncertain amount of time.

It actually also creates buying opportunities in my opinion, as the market remains for at least the next 1-2 years on a fundamentals-based growth trajectory until the economy begins potentially turning sour based on analysts predictions.

A sharp correction could create the possibility of entering at a particularly good price before the market bounces back as tariff conflicts stabilize. Now also may be a good time to look for good company and sector market opportunities in contrast to the easy rise of index investing the past few years.

In the meantime, I hope you will check out my recent interview with Former White House Communications Director Anthony Scaramucci, also currently Managing Partner at SkyBridge Capital, as we discussed market trends and the impact of tariffs going forward:

Also, in my interview with State Street Corporation (STT) the month prior we discussed how the then-still-volatile market environment could be better managed for investors:

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.