2 days ago
Can Economy Right The Ship In Wake Of Tariffs, Market Uncertainty?
Eldon Dryden Pence III serves as the Chief Investment Officer of Pence Capital Management . getty
Uncertainty is painful, and the first 100 days of the second Trump Administration have injected a healthy amount of market uncertainty.
Part of Trump's playbook for his robust policy agenda is moving faster than anyone can keep up, evidenced by the breathtaking number of executive actions during his first hours in office. While initial tariffs created a catalyst for a market correction, margin pressure has extended that further, with financial experts questioning whether the economy is on the brink of recession.
Resolving trade differences with Europe and China, and codifying a sweeping tax bill to provide relief to the middle class are essential for the health of the economy.
While I still expect new records for corporate earnings and the stock market to be set this year, let's analyze how the economy arrived here.
With the fifth anniversary of the pandemic behind us, many might be surprised to learn that the $5.3 trillion fiscal response remains a fundamental driver of today's economy. The U.S. pandemic fiscal response was the equivalent of roughly 25% of the 2020 nominal GDP.
A multiplier effect still lingers from that stimulus. History shows a similar pattern occurred in the middle of the 20th century when the stimulus from World War II remained into the 1970s. Known as the Golden Age of Capitalism, manufacturing and a rise in oil production were critical components of this decades-long economic boom.
While global geopolitical events could create short-term ripple effects, data shows that the markets usually shake it off within six months. A new administration, tariffs and taxes could each play a role.
Speaking at the World Economic Forum in January, the president proclaimed, 'America is back and open for business.' He was confident in that assertion, underpinned by an Economic Policy Institute report that confirms he inherited 'the strongest economy for an incoming administration since the George W. Bush administration.'
According to an analysis of first-term administrations from Eisenhower through Trump, the first year of a new administration brings an average market return of 7%, and the first year of a second term provides an average 9.7% market return. Trump's second term differs from most of his predecessors because it has not been consecutive, begging the question: Will the markets react as though this is the first year of a second term or the first year of a new administration? Based on average historical returns, the difference between the two is 2.7%.
Yet, economists have reservations. Mark Zandi, Moody's Analytics chief economist, warned of potential headwinds, citing that immigration and tariff policy could bring unintended consequences, including tax increases and job loss. The National Retail Federation also anticipated skyrocketing prices on clothing, household appliances, furniture and more.
While headlines have investors consumed by China trade talks, it's the EU we should focus on, representing our aggregate No. 1 trading partner. The initial 25% tariffs on EU cars, steel, and aluminum and 20% broader goods in April have been delayed until early July to set the stage for a wider agreement. As rhetoric heats back up with China, we are far from a consensus.
But tariffs are just one piece in a two-step policy of tariffs and tax cuts, and early estimates show that—on net—Trump's tax cuts are modestly more stimulative than his tariffs are restrictive. If passed, the president's 'big, beautiful bill' would extend the 2017 Tax Cuts and Jobs Act and institute a rash of new tax reductions including increasing the state and local tax (SALT) deduction. It would also temporarily lift the standard deduction for people over 65, raise the child tax credit and eliminate taxes on tips and overtime. While the final bill could change after amendments in the Senate, a preliminary topline analysis from the Tax Foundation found that the House GOP's version would boost long-run GDP by 0.8% and add approximately 983,000 jobs. In comparison, the Tax Foundation estimates that Trump's tariff plans would lower long-run GDP by 0.8% and cost 713,000 jobs. Essentially, the combination of tax cuts and tariffs may result in a net addition of 270,000 jobs to the economy and neutral impact on growth. Consumer leverage will steady the ship.
It's difficult to change habits, and behavior drives consumption. Despite tariff threats or actual tariffs, I remain cautiously optimistic that consumers will find the most straightforward, cheapest utility of what they want: bearing the brunt of cost increases without dramatically changing their behavior.
Economists say reciprocal free trade is good, and in a perfect world, all trade would be free to allow countries to produce what they do best. But that's not how the world works.
American businesses are competitive. We have the greatest global GDP. If all American companies need is a level playing field, maybe tariffs aren't bad.
So, let's not be terrified of tariffs. With consumer leverage on our side, most partners need us more than we need them.
Yes, uncertainty is painful, but consumers still haven't felt the broad repercussions. If the Trump Administration can make good on these two big deliverables of settling the tariff dispute with Europe or China and passing comprehensive tax reform, they hopefully won't see it at all.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted, and there can be no guarantee that strategies promoted will be successful.
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