Stocks Close Mixed Amid Trump Trade-War Fears
The ghost of Smoot-Hawley haunted markets today. President Trump signed a measure Tuesday that imposes tariffs on solar panel components and washing machines. Wall Street loves tax cuts. It hates protectionism.
The Dow Jones Industrial Average closed in the red. The S&P 500 and Nasdaq closed higher. Tech stocks were the star performers, driven by strong earnings.
President Trump’s “America First” policy could start a full-blown trade war, with dire consequences for many of the multinational blue chips commonly found in retirement portfolios. The geopolitical order that has prevailed since the end of World War II is now under assault by the Trump administration, with profound implications for investors.
The Dow also came under pressure from declines in Johnson & Johnson (NYSE: JNJ) and Procter & Gamble (NYSE: PG). Johnson & Johnson lost a patent battle today over its big-selling arthritis drug Remicade. Procter & Gamble’s operating results disappointed.
The S&P 500 and the Nasdaq rose Tuesday. Superb operating results from Netflix (NSDQ: NFLX) spurred gains in the technology sector.
FAANG stocks had a good day. Facebook (NSDQ: FB), Apple (NSDQ: AAPL), Amazon (NSDQ: AMZN), Netflix, and Google parent Alphabet (NSDQ: GOOGL) all closed higher. The catalyst was Netflix’s earnings beat.
But anxieties over tariffs kept the broad markets in check. Trump’s action today will impose duties of as much as 30% on solar equipment made abroad. For large residential washing machines, tariffs will start at up to 50%.
The tariffs are another blow from the White House against renewable energy. The $28 billion solar industry depends on parts made abroad for 80% of its supply. The Solar Energy Industries Association on Tuesday said the tariffs would cause tens of thousands of job losses. Solar stocks plunged today.
In his 1993 debate with billionaire Ross Perot about the North American Free Trade Agreement (NAFTA), Al Gore held up a photo of Sen. Reed Smoot and Rep. Willis Hawley.
Gore then asserted that the Smoot-Hawley Tariff Act of 1930 caused the Great Depression.
Gore spoke to Perot in his usual patronizing way, as if the billionaire were a fifth grader. And it’s debatable whether Smoot-Hawley actually caused the worst economic downturn in U.S. history. But it didn’t help.
During the 1930s, retaliatory tariffs imposed by America’s trading partners helped reduce our country’s exports and imports by more than half. This fact is not lost on investors.
The tariffs imposed by Trump today are aimed at China. He has South Korea under the crosshairs, too. But they apply to all countries. He has long charged China with unfair trade practices. He says lop-sided trade harms American workers. His goal is to protect U.S. firms from cheap imports.
China is America’s biggest trading partner. Trade between the two countries exceeds $578 billion, or 21% of all U.S. foreign trade. A tit-for-tat trade war would hurt both countries.
It’s not just China. Trump wants to tear apart the NAFTA agreement with Canada and Mexico.
U.S., Canadian and Mexican negotiators opened a sixth round of talks on NAFTA in Montreal on Tuesday. Time is running out for Canada and Mexico to address Trump’s demands. He wants to make NAFTA more favorable to the U.S.
Uncertainty over NAFTA casts a pall over business plans. The Trump administration threatens to walk away from the deal. If that happens, stocks would tank.
Trump’s rhetoric was protectionist during the 2016 campaign. But since he took office, he has held back from imposing barriers. Investors were hopeful that his words were only red meat for his base. They assumed he wouldn’t follow through. On Tuesday, Wall Street learned that he means it. In coming weeks, Trump is due to decide on measures against other imports. Steel and aluminum top the list.
Economists argue many points of view. They’re a quarrelsome bunch. But they agree on one topic: tariffs are bad. They’re bad for investors, bad for consumers, and bad for the economy.
Raising tariffs on imported goods simply passes along that tariff to the consumer. It doesn’t provide the expected stimulus to domestic producers of those goods.
On the other hand, free trade increases the variety of goods that consumers can choose. It decreases the cost of those goods through greater competition. It allows domestic industries to ship their products abroad.
Economists say the tariffs imposed today will result in job losses and higher prices in the U.S. They’ll also fuel geopolitical tensions. China won’t take the tariffs lying down.
The outbreak of a global trade war is now one of the biggest risks facing stocks.
Tuesday Market Wrap
- DJIA: -0.01% or -3.79 points to close at 26,210.81
- S&P 500: +0.22% or +6.16 points to close at 2,839.13
- Nasdaq: +0.71% or +52.26 points to close at 7,460.29
Tuesday’s Big Gainers
- ResMed (NYSE: RMD) +14.67%
Medical device firm beats on earnings.
- Netflix (NSDQ: NFLX) +9.97%
Streaming media giant reports stellar earnings.
- General Electric (NYSE: GE) +4.51%
Rumored asset sales cheer investors.
Tuesday’s Big Decliners
- Pretium Resources (NYSE: PVG) -26.59%
Miner’s gold production slips.
- Vitamin Shoppe (NYSE: VSI) -8.57%
Retailer seeks to close several stores.
- JinkoSolar Holding (NYSE: JKS) -7.91%
New tariffs clobber shares of China-based solar firm.
Letters to the Editor
“Basic materials stocks are doing well. I’m interested in your comments on natural resources ETFs for hedging purposes.” — Charles K.
Some investors seek natural resource stocks and ETFs as an inflation hedge. But natural resource firms aren’t always suitable safe havens. They’re riskier than, say, inflation-protected bonds.
Equity risk factors exert a greater impact on natural resource stocks than inflation risk factors. Commodity producers often hedge their production. That means they don’t enjoy the full benefit of rising prices.
Natural resource firms may carry high debt, which causes higher capital costs during periods of rising interest rates. They’re also exposed to political shocks, such as strikes.
Got questions about inflation hedges? Drop me a line: firstname.lastname@example.org
John Persinos is managing editor of Personal Finance and chief investment strategist of Breakthrough Tech Profits.