August 5, 2019 BARRON’S 5
New Tariff Threat Bites Investors
I
T WAS IN THE MIDDLE OF TELEVISION’S SHARK WEEK,
just when it seemed safe to go back in the water, that
another Great White attacked. It was Tariff Man,
returning to take an additional bite out of U.S.
consumers’ wallets and out of investors’ portfolios, as well.
By midday on Thursday, the stock market had all but
recouped its losses in the wake of the Federal Reserve’s pol-
icy meeting the previous day. That’s when President Donald
Trump announced that he will impose a 10%
levy on an additional $300 billion of Chinese
goods on Sept. 1. The shock sent stocks under-
water and resulted in this year’s worst week
for the S&P 500 and Nasdaq Composite, which
slid 3.1% and 3.92%, respectively. The Dow got
off with just a 2.6% nick. For the broad U.S.
stock market, the paper loss was about $1.
trillion, according to Wilshire Associates.
The tariffs’ potential blow to already slow-
ing world trade had an even stronger impact
on the bond market, with the 10-year Treasury note’s yield
having its biggest one-week decline in more than seven
years, falling 21.7 basis points, to 1.864%, the lowest since
Election Day, Nov. 7, 2016, according to Dow Jones data. (A
basis point is 1/100th of a percentage point.)
The irony, noted by more than a few observers, was that
the bond market reacted more forcefully to Trump’s tariffs
than to the Federal Reserve’s expected 25-basis-point reduc-
tion in its federal-funds rate target, to 2%-2.25%.
But the further possible corrosive effect of the new tar-
iffs led the federal-funds futures market to price in a 99%
probability of another 25-basis-point cut, to 1.75%-2%, at the
next meeting of the Federal Open Market Committee on
Sept. 17-18, according to the CME Group’s FedWatch. And
a further cut, to 1.5%-1.75% or less, is given a 74.8% chance
by futures traders.
But there’s a limit to how much lower interest rates can
offset the impact of escalating tariffs. This latest proposed
round is a “game changer,” according to Bank of America
Merrill Lynch global economist Aditya Bhave. It will hit
consumer goods, which mostly had been excluded from the
previous levies.
Notwithstanding Trump’s oft-repeated, but baseless, claim
that China pays the tariffs, they are levied on U.S. businesses
and consumers. Arguably, Chinese-made consumer goods
were excluded from earlier rounds of tariffs to avoid the obvi-
ous sticker shock from price hikes, Bhave writes.
Moreover, the dollar amount extracted by the tariffs will
exceed the incremental benefits in 2019 from the tax reduc-
tions enacted last year, notes the keen-eyed Washington
strategy team at Strategas Research Partners, led by Dan-
iel Clifton. The additional $30 billion from the proposed 10%
tariff on $300 billion of Chinese imports, due to take effect
next month, would bring the total take from the duties to
$138 billion this year—more than the $122 billion of addi-
tional benefits from the tax cuts.
Preliminary effects of the previously im-
posed tariffs were visible in trade data re-
ported on Friday. Imports from China were
down 12.6% in June from their level a year
earlier, while exports to China were off 16.8%,
wrote Jim O’Sullivan, chief U.S. economist at
High Frequency Economics, in a client note.
Meanwhile, combined imports from South Ko-
rea, Taiwan, and Vietnam were up 9.2%, sug-
gesting some substitution away from China.
But imports from those countries amount to only 31% of
those from China, some of which can’t readily be sourced
from other countries, he adds.
The trade situation all but overshadowed what normally
would be a big market mover: the July employment report re-
leased on Friday. The 164,000 rise in nonfarm payrolls almost
exactly matched economists’ consensus guess. However, the
two preceding months’ total was revised downward by 41,000,
and the average workweek ticked down by 0.1 of an hour.
Average hourly earnings were up 3.2% from the year-earlier
figure, a 0.1-percentage-point improvement. The headline un-
employment rate held steady at 3.7% while the underemploy-
ment rate fell by 0.2 percentage point, to 7%, its lowest level
since December 2000, reports TLR on the Economy.
So far, then, the domestic economy seems to be resisting
the trade-induced slowdown overseas. Housing appears to
be benefiting from the nearly 100-basis-point plunge in
mortgage rates, a side effect of the global slowdown that has
resulted in $14 trillion of bonds with negative yields. The
question of how long domestic activity can hold up in the
face of the tariff wars is what’s bedeviling markets.
I
S IT TIME TO TURN AWAY FROM TINA?
TINA, of course, is the acronym for There Is No
Alternative, in this case to common stocks, especially
U.S. equities. Low interest rates make bonds unattract-
ive and risky, according to this line of thinking, Alternative
Earlierleviesexcluded
Chinese-made
consumergoods,but
stickershockwillnow
beobvioustoshoppers.
Up & Down Wall Street
By Randall W. Forsyth