Donald Trump announced today that he intends to impose 25% tariffs on all imports to the US from Canada or Mexico and will also tack on an additional 10% to all import duties on Chinese merchandise, as soon as he takes office. The former seems to me to effectively upend the US-Mexico-Canada agreement (USMCA) that replaced NAFTA in 2020.
Trump’s rationale, as I understand it, is that in the decades following the Civil War tariffs imposed by Washington on imports of machinery into what was a chiefly agriculture-based US economy ended up raising money for the government. Therefore, tariffs should do the same today. That didn’t work with levies on sales of US soybeans to China during Trump’s first term, but maybe this time things will be different. And, of course, the Republican supporters of the McKinley tariffs of 1890 were pretty much all tossed out of office in the following election.
I have mixed feelings. The declared purpose of the tariffs is not to protect US companies from “unfair” competition, but to force China and Mexico to suppress shipments of illegal drugs to the US. This is a noble goal, in my view. On the other hand, the Trump first-term agricultural tariffs hurt US farmers (who voted for him back then and again this time around–go figure) so badly that the federal Commodity Credit Corporation had to dispense close to $30 billion in aid to offset lost revenue.
What is the stock market saying?
–Ford and GM are both down today, since both make considerable use of manufacturing in Mexico. Foreign carmakers, too.
–NASDAQ, filled with multinationals and tech (i.e., non-manufacturing) is up. The Russell 2000, composed of mostly domestic firms and with companies that manufacture things, was down. This makes sense, too. These last, whose stocks were just starting to catch up with their loftier-multipled tech brethren, are playing the role filled by the soybean farmers in 2016. If I had to guess, there won’t be a bailout for them.
The biggest beneficiary of the new tariffs? My guess is that it’s Trump mega-donor Elon Musk, since the tariffs may delay/derail the plans of BYD, the world leader in EV sales, to build a plant in Mexico that would serve the US market.
How to shape an equity portfolio? That’s always the key question for us as investors.
If we go back to first principles (at least my first principles), the starting point is always the index, the S&P 500, or the NASDAQ for the more risk-prone.
I imagine the index as being like a round ball of clay. If I take my own portfolio clay and shape it so it looks just like the index, I get the market return. To get a different return, I have to pull my clay out or push in so that I create a different shape.
Anyone can do that part. The real trick is to be clever enough to make a small number of significant alterations in the shape–maybe even just one–in a way that produces not only a different return than the market’s, but a better one. With every alteration, I am betting that I know more about the current situation than the market. This is the height of arrogance. But it’s what we all do when we step on the field and start to play the game.
Of course, once we’ve made our alterations, overweights or underweights, we’ve got to watch them like a hawk to make sure they’re doing what we expect. One other thing: experience tells me that no one can watch twenty over-/underweight positions. In all likelihood the deviations are all too small. But in 28 years in the stock market, I never encountered anyone who could monitor anywhere near that number of positions. Much better to have five, in the hope that two will work out and you’ll catch the losers and eliminate them before they do too much damage.
more tomorrow