By James Mackintosh
As you were. President Trump's on-again, off-again tariffs briefly hit the market on Monday, before fear evaporated. What it shows: Investors are convinced he will use tariffs to extract concessions on other issues, rather than, as he keeps saying, to raise money and force companies to relocate to America.
On Monday, investor confidence that tariffs won't break the bull market proved mostly right. The S&P 500 closed down just 0.8%, as Trump suspended a 25% tariff on goods from Mexico for a month hours before it was due to go into effect. Canadian Prime Minister Justin Trudeau said Trump had agreed to suspend tariffs on goods from his country too, while China hopes to negotiate over the 10% extra being imposed on its exports to the U.S.
Aside from the sheer entertainment/horror (depending on whether or not you are Canadian), Monday told us quite a lot about what investors believe. This will be useful when Trump turns his attention to other countries -- or back to Mexico and Canada.
There were three lessons to draw from the market's swings: Confirmation that investors really do think tariffs will be at most temporary. Proof positive that investors disagree with Trump about the effect of tariffs. And evidence that Big Tech stocks aren't immune to tariffs, even though so much of their valuation depends on hopes about artificial intelligence.
Tariffs won't last
Even before Mexican President Claudia Sheinbaum bought a month's grace on the tariffs by promising to deploy 10,000 soldiers to the U.S. border, stocks weren't down that much. The S&P fell almost 2% at its worst, a bad day but hardly indicative of the breakdown of the global-trading order.
It surprises me that investors are so confident that the self-declared "tariff man" doesn't, at heart, want to impose tariffs. After all, they were wrong after the election when they bet that Trump would deliver the goodies he had promised, such as deregulation and lower taxes, before moving on to tariffs.
That confidence faded as Trump's tariff rhetoric grew, but the new, market-supporting theory is that tariffs will be temporary. So, sure, they will disrupt a bunch of industries -- General Motors stock was briefly down 6% on Monday, because the cross-border supply chain for autos is perhaps the most integrated in North America. But Trump will negotiate. It is all about the art of the deal, and Trump has been clear about what he wants from these tariffs: Fewer immigrants and less fentanyl smuggling.
In the president's first term, tariffs were constantly chopped and changed, which supports the idea that they won't last. Tariffs on Colombia, imposed last week after it refused to accept U.S. military flights carrying shackled deportees, were dropped as soon as a face-saving deal was reached.
The danger is that Trump turns out to be Tariff Man after all. He has talked repeatedly about using tariffs to help finance the federal budget, which he can only do if they are widespread. He has warned businesses they need to relocate to the U.S., which they will only do if permanent tariffs are imposed. And he thinks the U.S. can withstand the economic pain, because "we have all the oil we need, we have all the trees we need," he said. Again, such resilience matters only if there are longstanding tariffs.
Tariffs are stagflationary
Long-dated Treasury yields fell, as investors bet on slower growth. But short-dated yields rose, as investors priced in a more hawkish Federal Reserve.
In normal times, a tariff shock pushing up prices might be ignored by the Fed. But after the inflation under former President Joe Biden, investors think the Fed will worry that even a one-off rise in prices might raise fears of future inflation. It then could be more reluctant to cut rates as a result. Higher rates than previously expected, without more growth, in turn hurts the economy and stock prices.
Some on Trump's economic team argue that carefully planned tariffs could raise money for the U.S. without hurting the economy. In effect they would impose a tax on the rest of the world. Judging by Monday's market reaction, investors aren't buying it.
Big Tech is immune
The biggest stocks in the market make much of their money from services, such as cloud computing and online advertising, and won't be directly affected by tariffs.
But on Monday it became painfully clear that this doesn't apply to all of the Magnificent Seven. Alphabet, Amazon, Meta and Microsoft fell 2% or less at their worst, about in line with the S&P. So far, so immune. Tesla, Nvidia and Apple, not so much. The three were off 8%, 6% and 4% at their lows, and even after partial recoveries performed much worse than the market.
Their problems are partly fundamental, with Tesla snarled in the North American autos supply chain, and partly China, where Apple makes a lot of goods for export and Nvidia sells a lot of chips. Tariffs and worse relations with China aren't what investors want to hear.
But their problems are also about excessive optimism. Leave out Amazon because of its weird profit-suppressing retail operation, and Apple, Nvidia and Tesla were last week the three most expensive of the Big Tech stocks, trading at 31, 30 and 131 times expected earnings. High valuations make them more vulnerable to anything that impedes their future profit.
On top of all this is some strange double-think. Many investors think Trump treats the stock market as a live approval indicator, so a big fall would make him rethink. But so long as investors don't expect tariffs to be a major feature of the next four years, there will be no market pressure on Trump to change course.
The mind-bending feedback loop makes it easy for investors to get it wrong -- even if they are right that Trump is an avid watcher of the S&P.
Write to James Mackintosh at james.mackintosh@wsj.com
(END) Dow Jones Newswires
February 03, 2025 17:01 ET (22:01 GMT)
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