Lexicon Financial Group Weekly Update — December 4, 2024
“Smoot and Hawley ginned up The Tariff Act of 1930 to get America back to work after the Stock Market Crash of ‘29. Instead, it destroyed trade so effectively that by 1932, American exports to Europe were just a third of what they had been in 1929. World trade fell two-thirds as other nations retaliated. Jobs evaporated.”
From the desk of Craig Swistun, CIM, MFA-P, Portfolio Manager, Raymond James Investment Counsel, and Wayne Hendry, Client Relationship Manager, Raymond James Investment Counsel
Looking Around
US President-elect Donald Trump has promised to impose significant tariffs on imported goods, including those from Mexico, Canada, and China, starting on the first day of his administration. So naturally there has been a lot of discussion in the economic press about the potential impact of these tariffs.
Take Canada, for example. The U.S. imports several million barrels of oil per day, along with cars, machinery, and other various commodities, plastics, and wood from Canada. Previously, Wayne worked for Honda of Canada. Their facility in Alliston, Ontario, exports almost 80 per cent of its product line to the US. There will undoubtedly be an impact on that facility and its 4200 employees.
According to Karl Schamotta, chief market strategist at Corpay Cross-Border Solutions, the proposed trade tariffs, if implemented, could impact a number of strategic U.S. industrial sectors that rely on imports. Unless domestic supplies are found or domestic manufacturers are created, this would increase the prices of products for Americans, potentially raise interest rates, and further weaken an already-vulnerable household sector. Most mainstream economists believe tariffs will be inflationary, and the Peterson Institute for International Economics has estimated Trump’s proposed tariffs could cost the typical U.S. household over USD 2,600 a year. (1)
But because our modern economy is highly interconnected, additional trade tariffs will impact international trade – the purchase and sale of products and services by companies in different countries. Consumer products, raw materials, food, and machinery are all bought and sold in the international marketplace. This allows countries to expand their markets and access products and services that otherwise may not have been available domestically. In many instances, international trade exists because sovereign borders make little sense in the real world. It’s a 100 km drive from Vancouver to Bellingham, Washington. As a result, it's actually cheaper to ship a product made in Vancouver to the US than it would be if the manufacturer were in the US Southeast.
Ultimately, international trade makes markets more competitive, which can ultimately lead to better prices, an incentive to innovate, and lower costs. We can experience the impact of international trade by simply going to a supermarket where Costa Rican bananas, Brazilian coffee, and a bottle of South African wine can be found. International trade was key to the rise of the global economy. (2)
From a policy standpoint, if the US goes ahead and implements significant tariffs, other countries may retaliate. That means that US-made products would become more expensive abroad, which could result in a loss of sales and revenue for companies that are global in nature. In such a scenario, all involved countries lose out from lower productive efficiency and higher consumer prices. (3)
To see signs of international retaliation, we need only look at what happened last week. The Biden administration issues a crackdown on China’s semiconductor industry, limiting its ability to increase the development of artificial intelligence. These restrictions prevent US-based companies from exporting certain computer chips to China. In turn, China retaliated by banning shipments of the raw materials used to build semiconductors in the first place – gallium, germanium, and antimony.
According to researchers at the Federal Reserve Bank of New York, the tariffs announced in 2018 and 2019 of 10 to 50 per cent on more than USD 300 billion of imports from China led to “a negative effect on the U.S. economy that is substantially larger than past estimates.” They also found that the U.S. stock market fell 11.5 per cent on days when the tariffs were announced, amounting to a USD 4.1 trillion loss in firm equity value. The declines were persistent, and markets didn’t bounce back in the week following the announcements. The announcements also spurred a “flight to safety” among investors, sending Treasury yields lower and equity premia — the rate of return on stocks relative to safer assets — higher. (4)
While it’s important to understand the impact of tariffs on the global or domestic economy, from a portfolio construction perspective, it’s only one thing that we consider. That’s because a long-term investor will experience changing economic policies across multiple jurisdictions. They’ll see the rise and fall of governments, regional conflicts, pandemics, natural disasters, and more. Against the backdrop of time, events always shake markets. And then they adjust.
Who knows? These proposed tariffs may just be what they were the last time he was president: a negotiation tactic. Only time will tell. We believe that whatever happens in 2025, diversification remains the best approach to long-term investing.
Read and Watch
Want deeper insight into topics in your Weekly Update? Then, read and/or right click:
With nine days to go, what do major Canadian bank economists expect for interest rates?
How President-elect Donald Trump’s policies may affect investors in these 8 market sectors
Why Trump's plans for tariffs could be bad for Europe's economy
Analysis: China’s economy and its influence on global markets
Looking Back
Canada’s main stock index, the S&P/TSX composite index (TSX), extended its November gains last Friday by moving to a new record high, with technology and industrial shares rising as investors welcomed greater clarity about the economic outlook following the outcome of the U.S. election. The Canadian dollar posted its third straight monthly decline against its U.S. counterpart in November as Canada’s economy grew just 1 per cent in the third quarter. This prompted investors to raise bets on another outsized interest rate cut from the Bank of Canada.
U.S. President-elect Donald Trump has pledged to cut taxes and loosen business regulations. These measures could boost the U.S. economy, but the potential for higher fiscal deficits under the Trump administration, as well as inflationary tariff and immigration policies, could reduce prospects for Federal Reserve interest rate cuts and raise long-term borrowing costs, according to some analysts. (5)
Stocks in the U.S. recorded another week of gains, lifting the Dow Jones Industrial Average, S&P 500 Index, and Nasdaq into positive territory. Trading was relatively robust in the runup to Thanksgiving Day on Thursday last week. Domestic policy and geopolitical factors appeared to be large drivers of sentiment during last week. On Monday, investors seemed to welcome President-elect Donald Trump’s nomination of Scott Bessent, a veteran hedge fund manager, as Treasury Secretary. Bessent is seen as bringing a Wall Street mindset to the position, prioritizing economic stability and inflation control with a measured approach to tariffs. Trump’s proposed 25 per cent tariff on imports from Canada and Mexico spooked U.S. automakers. When trading opened on Tuesday, shares of Ford and General Motors fell sharply on the news due to concerns over the automakers’ heavy reliance on cross-border trade with Canada and Mexico, which involves both the shipment of auto parts and final assembly. News of a cease-fire agreement between Israel and Hezbollah also seemed to boost investor sentiment and may have overshadowed renewed tariff concerns. Energy stocks fell on the news, as oil prices pulled back in response to reduced fears of an expanding conflict involving Iran.
Although the pan-European STOXX Europe 600 Index ended on a positive note last week, other major markets were mixed. Annual inflation in the eurozone accelerated for a second month in November to 2.3 per cent from 2.0 per cent in October, according to preliminary data. This increase was not unexpected, as last year’s declines in energy prices are no longer incorporated in the annual rates. That said, underlying inflation unexpectedly eased. Financial markets still expect the European Central Bank to lower borrowing costs next month, although the size of the reduction remains uncertain.
Japan’s equity markets registered modest losses last week as geopolitical risks weighed on investor risk appetite, driving demand for assets perceived as safer. Subsequent yen strength also posed a headwind for Japan’s export-heavy industries.
Chinese equity markets rose as hopes for greater government support offset concerns about potential U.S. tariff hikes. (6)
The opinions expressed are those of Craig Swistun and not necessarily those of Raymond James Investment Counsel which is a subsidiary of Raymond James Ltd. Statistics and factual data and other information presented are from sources believed to be reliable, but their accuracy cannot be guaranteed. It is furnished on the basis and understanding that Raymond James is to be under no liability whatsoever in respect thereof. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. Raymond James advisors are not tax advisors, and we recommend that clients seek independent advice from a professional advisor on tax-related matters.
Trump ups the ante on tariffs, vowing massive taxes on goods from Mexico, Canada and China on Day 1, David Goldman, CNN, November 26, 2024
International (Global) Trade: Definition, Benefits, and Criticisms, Reem Heakal, Investopedia, September 19, 2024
Who Benefits from Trade Wars? Wolfgang Lechthaler and Mariya Mileva, Intereconomics, Volume 53, 2018
Past Trump Tariffs Hurt US Economy, Stocks, Research Finds, Amara Omeokwe, December 4, 2024
TSX, S&P 500, and Dow all close at record highs as tech rallies, Globe and Mail, November 29, 2024
Global markets weekly update, T. Rowe Price, November 29, 2024
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Looking to Learn?
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What Is a Tariff and Why Are They Important?
Nations are almost always better off when they buy and sell from one another