Equity Market Investors May Want to Go Back to the Drawing Board
The Supreme Court decision is likely to end up creating more, not less, trade policy uncertainty.
Key Takeaways
Trade War Enters a New Phase: What matters is that President Trump is pretty well done with his tariff war now. These 15% blanket tariffs expire in 150 days, and there is zero chance that he is going to get 60 votes in the Senate for an extension. Countries have no incentive to live up to trade deals or investment pledges because Trump can’t hit back with arbitrary punitive tariffs any longer. His hammer is gone — Section 301 requires lengthy investigations to prove that there are unfair trade practices.
Supreme Court Ruling is Disinflationary: What is not yet appreciated is that when you trace out the implications of no more IEEPA tariffs, and the fact that the President only has a five-month lifeline on these 15% tariffs under Section 122, (even with the other select and strategic levies already enacted which the President does have control over), what was a 16% effective tariff rate last week will dive to 9% by the end of the summer. That alone should shave at least -30 basis points from the inflation rate.
Cyclically-Sensitive Sectors Are Shrinking: When you examine the most cyclical aspects of the economy from that Q4 GDP data, within both the goods and services industries, they collectively have subtracted from headline growth now in three of the past four quarters. In fact, these cyclically-sensitive segments contracted at a -2.4% annual rate in Q4 — and the YoY trend has swung from +3.0% a year ago to -0.4%. An examination of 70 years’ worth of data shows that this has never happened absent an outright recession.
