The Roller Coaster Continues

It’s certainly been a roller coaster with the markets and tariffs this past week, I’m sure leaving many of you feeling anxious. President Trump announced a 90-day tariff pause for many countries, which resulted in the largest one-day gain in the S&P 500 since 2008.  The pause allows breathing room for negotiations to occur, but uncertainty remains. 

The motive behind the Trump Administration’s policies remains unclear to me. I think the following explains why perhaps there has been such a drastic and largely unexpected about-face.

The great advantage the Americans have in waging a global trade war is that they are not very dependent on trade. In fact, the United States is one of the least trade-oriented economies in the world, with exports accounting for just 11 per cent of GDP. Herein lies the leverage at the core of the Trump administration’s footing; Washington believes it can inflict much more pain than it might bring upon itself.

The flaw in that plan is the stock market, which ultimately forced the President to pause his reciprocal tariffs hours after they went into effect. White House officials have been quick to dismiss the fear that the U.S. economy was being put at risk. In other words, the U.S. is in fine shape to endure a trade war of its own making. It can rain punitive tariffs down on the rest of the world while its mighty domestic economy gives it cover against retaliation. Perhaps that’s true, so long as the U.S. stock market doesn’t go haywire. Because unlike the real economy, it is highly globalized.

But when the stock market falters, bad things start to happen. Household wealth declines. Retirement plans are put at risk. Consumers seeing their savings melt away start to change their spending habits. Companies run afoul of debt covenants. Projects are shelved. Eventually, the knock-on effects start to show up in the hard data – consumer spending, corporate earnings, and the labour market. We’re now seeing the leading edge of that economic downturn.

Stocks now account for nearly 45 per cent of total household financial assets in America, and never before have American households been more exposed to the stock market. Many of them are already growing cautious with how they spend. This is called the “wealth effect.” It’s an economic positive when the market is cooking. But on the way down, the wealth effect turns negative, transmitting stock market turmoil to an economy rooted in consumer spending. And the economic firewall the Trump administration thought it was behind crumbles.

Hopefully we gain more clarity over the next 90 days, but while we can’t be certain where the tariff situation is going to wind up, we can at least see that the president is showing an increased willingness allow for some calm to enter the markets. Overall, today’s move is a classic example of why not to panic, and why having a thoughtful and disciplined approach is crucial.