Gulf News

A little tariff talk goes a long way in spooking investors

- By Stephen Gandel

Anyone making a pros and cons list for the market would surely find much more to put in the pro column.

The economy continues to chug along with no recession in sight. Globally, growth seems to be in the beginning stages of a resurgence. US corporatio­ns, in part because they are holding onto much of their tax cut gains for now, are expected to have their best earnings growth — nearly 20 per cent — in years in the first quarter. Much of the market, outside of tech that is, looks relatively cheap suddenly. Unemployme­nt is historical­ly low, yet inflation, which is usually stoked by tight labour markets, remains in check. And while the Federal Reserve signalled on Wednesday that it might go a little faster on interest rate increases, the rate that matters the most, the one on 10-year Treasury bonds, is still well below the point that should make investors nervous.

Given all that, the market would seem to be able to easily shrug off any whiff of bad news. And yet investors can’t seem to shake the fear of tariffs. The Dow Jones Industrial Average was down more than 700 points on Thursday on news that the Trump administra­tion planned to impose tariffs on as much as $60 billion (Dh220 billion) worth of Chinese goods. The S&P 500 Index was down more than 2 per cent. This follows the market’s earlier tariff tantrum, that time over levies on steel and aluminium imports in mid-February.

As with the metal tariffs, the likely direct economic impact of the Chinese tariffs is small. Even if the White House goes with a 25 per cent tariff, as it did with steel, the levy on $60 billion in Chinese goods would cost only $15 billion. It would most likely affect US exports to China, which has vowed to retaliate. But those amounted to only $130 billion last year. If China were to impose a similar tariff on a similar percentage of goods coming into the country, that would amount to another hit of only about $6 billion. A combined $21 billion is not much to swallow for the US’s $19 trillion economy. And as with the steel tariffs — which ended up excluding Canada and Mexico and with them much of that metal that comes into this country — the administra­tion could settle on an implementa­tion that blunts the true effect of the China tariffs as well.

Growth expectatio­ns

And yet there may be good reason, despite all that, for the market’s tiny tolerance for tariffs. First, global trade matters a lot more to the large public companies that make up the S&P 500, which generate nearly 50 per cent of their sales from overseas, than it does to the economy in general. And investors, based on current stock prices even after the recent dip, are expecting a lot out of those companies.

Thanks to the tax cut, companies will most likely be able meet growth expectatio­ns this year no matter what. But producing anywhere close to double-digit growth becomes much harder next year. The US economy has only been growing about 2 per cent a year, and few economists, despite the president’s promises, expect much more than that.

To meet those growth expectatio­ns, US companies need to be able to tap the global economy, particular­ly emerging markets like China that are growing much faster than 2 per cent. A higher dollar, typically a side effect of higher tariffs, could be a significan­t drag on S&P 500 companies’ profits.

In short, the market is priced on the assumption that large US companies will be a bigger part of the growing world economy. Instead, Trump’s tariffs and especially his protection­ist rhetoric threaten to cut more and more of the world off.

That’s not something that US companies and investors thought was possible just a year and a half ago. As a result, it’s not that surprising investors aren’t taking it all that well.

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