Experience is the best teacher, but not if school is canceled.
Stocks fell sharply Monday and again on Tuesday after President Trump said there was “no room left” for Canada or Mexico to avert steep tariffs and that existing ones on China would be increased. Hours later, the levies kicked in. The S&P 500 has now erased its year-to-date gains and is in negative territory.
Is the selloff an overreaction? The bull market kept rolling the last time Trump initiated a trade war in 2018 and 2019.
But investors might have faulty memories. Back then, landmark corporate tax cuts had just taken effect. They also included a provision allowing companies to use temporary bonus depreciation. Largely as a result, by late 2018, operating earnings and capital spending by S&P 500 companies were racing ahead at their fastest clip for almost any period aside from recoveries from a recession.
The profit and investment boom softened the blow from those less-sweeping tariffs. By late 2019, though, earnings momentum had run out, along with boardroom optimism. That December, the Institute for Supply Management’s manufacturing index fell to its lowest since the financial crisis.
What happened next? A recession and a bear market, but because of the Covid-19 emergency, not the trade war. With a slug of election-year stimulus, stocks might have muddled along. We’ll never know.
Monday, just hours before tariffs were confirmed, featured ISM’s report for February. This headline number wasn’t bad, yet the underlying details were: New orders fell sharply from the highest in years to contraction territory. Meanwhile, prices paid and deliveries surged. Together they suggest a rush to stock up in case of tariffs and a likely slowdown in building future inventory.
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