Tariffs Part Two

Tariffs Part Two

In February, the U.S. stock market declined slightly, with the Wilshire 5000 down 1.94%. Foreign stocks, on the other hand, rose slightly, with the global ex U.S. stock market returning 1.4%. A decline in interest rates led bonds to outperform equities, with the U.S. Bloomberg Aggregate Bond Index returning 2.2%. The first two months of 2025 have brought a shakeup of market leadership. As an example, U.S. growth and technology stocks were last year’s favorites, but both are now slightly negative for the month and the year. One glaring example is Tesla. The company’s stock price nearly doubled in the aftermath of President Trump’s reelection but has since fallen nearly 40% from its mid-December peak and 27% since the year began. Developed market international stocks have roared back to life, delivering 1.2% in February and 7.3% for the year.

Last month we wrote that 25% tariffs on Canadian and Mexican imports were scheduled to take effect early February, but President Trump reversed this decision at the eleventh hour and paused these tariffs for 30 days. He did follow through with his plan to place an additional 10% tariff on Chinese imports and is now threatening a to add another 10%. Regarding the paused North American tariffs, they are scheduled to take effect March 4th. One of the problems with these proposed tariffs is that they would have the perverse effect of making some key American goods, such as automobiles, less competitive since their production relies heavily on other imported North American parts. Asian and European auto imports would actually become cheaper relative to domestic autos because they would not be forced to absorb 25% tariffs. To illustrate this point, the CEO of Ford recently told conference attendees:

“Let’s be real honest: Long term, a 25% tariff across the Mexico and Canada borders would blow a hole in the U.S. industry that we’ve never seen. Frankly, it gives free rein to South Korean, Japanese and European companies that are bringing 1.5 million to 2 million vehicles into the U.S. that wouldn’t be subject to those Mexican and Canadian tariffs. It would be one of the biggest windfalls for those companies ever.”

In our opinion, Trump will, at some point, digest this reality. Should he actually apply the 25% tariffs, he would likely eventually remove them as the backlash from consumers and many domestic autoworkers would be sharp. The fallout would also go against his promises to help American workers and lower prices. While one could plausibly hold a long-term vision of more domestically sourced manufacturing, there is no way for industries to suddenly source everything from within the United States overnight. Nor will companies be eager to invest billions in new U.S. production based on a policy that could expire in a few years.

On another topic, the 2024 tax season is upon us. Schwab has now generated all initial tax forms (please note, Schwab has not yet posted corrected forms). Clients will receive these forms either by U.S. mail or via their Schwab online portal. If you would like help accessing your tax forms, please reach out to your Bell relationship manager. We are happy to assist you.

 

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