Trump Throws the Markets a Curve


It’s warm and sunny in Florida and Arizona, where baseball’s spring training is underway.

It’s the time of year when players are chipper, managers are geniuses, and fans of every team from the world champion Houston Astros and the new Murderers’ Row New York Yankees to the cellar-dwelling Detroit Tigers and Philadelphia Phillies think they have a good shot at winning it all.

Meanwhile, a Nor’easter has pelted the middle Atlantic states with wind, rain, even snow, and a different kind of storm engulfed Wall Street. Since Tuesday, the Dow Jones Industrial Average has lost more than 1,000 points and the S&P 500 is down nearly 100 (although both rallied off their lows).

Gurus and pundits blamed it on two things. First, new Federal Reserve Chair Jay Powell’s Congressional testimony, in which he noted how good the economy was, led some traders to conclude there would be four, not the expected three, rate hikes this year.

And then on Thursday, President Donald Trump announced he would impose 25% tariffs on steel and 10% tariffs on aluminum imports to protect American jobs. The move surprised many as the corporate free traders in the administration lost to the economic nationalism that had defined his presidential campaign.

So, which one mattered more? And what’s next?

I would dismiss out of hand the concerns about the Fed.

The federal funds rate is only 1.5%. Four rate hikes this year would get us to 2.5%, still way below where it usually is when unemployment is this low and the economy is this strong. At this pace fed funds might hit 3% by late 2019, so this is no big deal.

The tariffs are a whole different story. Besides possibly raising prices for consumers and spurring inflation, only 140,000 Americans work in steel and aluminum production and extraction, while 6.5 million Americans work in industries that use steel and aluminum. It seems an awfully high price to pay just to appease a small sliver of voters.

Even worse is the potential ripple effects. The European Union is already discussing retaliatory measures. Canada, probably our closest ally, is hurt the most, and will surely respond. And China, which is not one of the biggest exporters of either material, may weigh in. Some have speculated this could be the beginning of the end for NAFTA, which would be a very big deal for the economy and markets.

We don’t know whether Trump is serious or just bluffing; he’s tended to fold when he gets too much heat. But this is the kind of uncertainty markets hate, and until we get real clarity on this, it will be difficult for stocks to rally again.