Market Insights Special Edition — Tariff Update

Hello, I'm Steve Orr, Chief Investment Officer at Texas Capital’s Private Bank.

How about a quick update on tariffs and the market reaction? Big down day for stock markets and bond yields. What to make of it? Well, first, Trump announced some of the largest tariffs ever yesterday on goods coming into the U.S. His rationale was that we've been too nice to other countries for too long, letting them sell their goods and services to our consumers, but not letting our companies sell to their people on the same terms. The real reason is to create a new revenue stream for the government to replace money lost to tax cuts. You remember from the campaign: no tax on tips, no tax on Social Security? There you have it.

We sketched out good, OK and bad cases for tariffs before yesterday. The announcements yesterday were worse than OK and just a little better than bad. Certainly, they were bad enough to catch markets off guard. Nasdaq, whose tech companies earn most of their money overseas, fell 6%. S&P 500, 4.8%. Small company stocks were down 6.5%. Overseas markets fared better, falling just 2 to 4%. Trump talked all the way through the campaign about tariffs, calling them beautiful and that he was Tariff Man. There's lots of tables and data out there on the web, but I'm just going to summarize. Before yesterday we generally tariffed goods coming into the country around 2%. Starting Saturday, every country's imports to the U.S. gets a 10% charge. About 60 countries get charged more. Vietnam gets hit with a 46% tariff. China, 54 to 79%, depending on the item. And those 60 countries’ tariffs will take effect April 9th. 

If all these tariffs were to go into force for a full year, they’d likely raise about $500 billion in revenue. Taking a chunk out of our $2 trillion deficit. But likely, less revenue is going to be earned. Some countries are going to adapt; some are going to retaliate. So we pencil in a drop in our economic growth, of about 2%, and we raise our recession odds to about 50% for later this year. Inflation could rise by a full percentage point to around 4% by the end of this year. Granted, these are quick estimates, and a lot, I mean a lot could change in the next three months. Second, we doubt the full list of tariffs really hits the market. Remember, Apple makes 90% of its iPhones in China, the rest in Vietnam. We're going to find out real quick who Tim Cook is calling. And by the way, the courts are going to have their say fairly quickly. Injunctions, people running to the courthouse because the rules Trump used for these tariffs are pretty weak. So, granted, he does have five other federal laws he can use, but each of those take time to build up studies and months of data gathering in order to implement them. Look also for Congress to jump on the tax bill, citing new tariff revenue as a way to pay for tax cuts. Finally, earnings are set to grow this year and though yesterday's announcement raises recession odds, we think strong balance sheets and steady consumption will keep the economy moving through the tariff noise in the next few months. 

To summarize, the global economy was doing OK before this announcement. Countries and courts are going to have their say. Earnings are still going to grow this year. There will be a lot of news noise as countries sort things out. Markets are going to continue to react to the uncertainty, but odds of a bear market remain low. Let us know how we can help you; 'til next time.