Does a global trade war scare anyone? Apparently not Wall Street.
Following President Donald Trump’s directive for his administration to investigate the possibility of imposing reciprocal tariffs on a large number of U.S. trading partners, the S&P 500 SPX closed Thursday just short of a record close.
Because the long-threatened decree does not instantly impose tariffs, as investors and foreign officials had expected, investors applauded. Additionally, it comes after other tariff-related measures that were thought to be less burdensome than first claimed.
George Young, partner and portfolio manager at New Orleans-based Villere & Co., an investment adviser with $1.8 billion in assets under management, said the rise mirrored market views that “the bark is worse than the bite” in regards to tariffs.
Less than 0.1% separated the S&P 500 from its record close of 6,118.71 set on January 23 as it increased 1% to settle at 6,115.07 on Wednesday. The Nasdaq Composite COMP surged 1.5%, while the Dow Jones Industrial Average DJIA increased 342.87 points, or 0.8%.
Earlier this week, Trump levied 25% tariffs on all U.S. imports of steel and aluminum. He said earlier this month that imports from China would be subject to an additional 10% tax and that imports from Canada and Mexico would be subject to 25% tariffs. After leaders from both nations promised to take action to strengthen border security and combat drug trafficking, the tariffs on Canada and Mexico were swiftly halted.
However, Young told MarketWatch over the phone that the surge does not imply that the market is immune to future shocks related to tariff measures or other policy ideas.
His words, “We know this is a new norm,” “It’s not the market moving past it, it’s absorbing it bite by bite and waiting to see what’s being executed.”
Indeed, the tariff saga seems far from ended, even though market bulls may be applauding. Senior White House officials said that reciprocal tariffs might be implemented within a few weeks or months.
Although the administration seems to have abandoned its demand for a 10%–20% universal tariff on imports, Paul Ashworth, chief North America economist at research firm Capital Economics, wrote in a note that the broad standards officials laid out for evaluating the new tariffs, which would be applied country-by-country, would probably lead to an even greater increase in average tariffs and U.S. consumer prices.
According to Matt Eagan, portfolio manager and head of the Full Discretion team at Loomis, Sayles & Company, an investment manager with about $389 billion in assets under management, the tariff threat is one of the “many paradoxes” ingrained in Trump’s agenda that are challenging to resolve and may cause volatility spikes.
“While extending tax cuts might boost spending, it might also make the budget deficit worse. Controlling immigration may increase salaries while simultaneously tightening labor markets. In a letter, Eagan warned that tariffs might lead to a trade war that would lower demand and drive up costs. “We believe it will be beneficial to cut through the clutter and concentrate on Trump’s objectives and limitations. We caution against complacency, even though his acts may be more bark than bite.
Investor complacency may potentially contribute to a risky feedback loop, cautioned Christopher Smart, managing partner at Arbroath Group, a company that provides investors with geopolitical risk advice.
According to Smart, the absence of a selloff would allow Trump to become more aggressive rather than fear that a negative market response will limit the extent of tariffs.
“It’s hard to know where [tariffs] will land or how high they will be, but many will surely take effect,” he stated. “And given the relative calm that investors have shown so far, the president may feel even more emboldened to test the extremes.”
