Category: trump-tariff

• Stocks have stumbled after being priced for another major rally under Donald Trump.
• Markets are nervous about the possibility of slower economic growth with higher prices.
• But UBS strategists think uncertainty about tariffs will clear up in the coming weeks.

Investors who went to the ballot box last fall with their pocketbook top of mind could be battling a case of voter’s remorse, even as market strategists say it’s way too soon to lose hope.

US stocks slipped into correction territory less than two months into President Donald Trump’s second term — a stark contrast to the rip-roaring rally after he won in 2016.

Voters who were fed up with inflation and keen for tax cuts and deregulation may be frustrated by the administration’s decision to prioritize revising trade policy with tariffs, or import taxes.

Tariffs provide a financial incentive for consumers and businesses to buy domestic goods, which fits with Trump’s “America First” policy. However, economists worry that they’ll fuel inflation and lead to retaliatory tariffs that would hurt domestic businesses, resulting in less spending and slower growth overall.

Although few are ready to call for a recession, there’s an increasingly serious risk of stagflation, according to UBS Global Wealth Management. The firm, which has long been optimistic, thinks the odds of a frightening scenario where economic growth disappoints while inflation picks up are 20%, up from 15% before mid-March.

“We expect aggressive trade policy to weigh on US economic growth, but not so much as to drive the US toward a recession or to prevent a recovery for equity markets,” Solita Marcelli, an investment chief at UBS GWM, wrote in a March 17 note. “That said, last week we changed our scenarios to reflect that the risks around our central scenario are now skewed to the downside.”

Stagflation is the market’s biggest fear

Despite these concerns, Trump’s team is defying consensus wisdom by using tariffs to shake up the status quo in global trade, which they see as unfair to the US. Markets aren’t pleased with this approach, but the new administration doesn’t seem to mind.

Trump’s supply-focused economic philosophy revolves around bringing back US jobs and delivering the tax cuts and deregulations championed by conservative economists. In theory, this plan could boost domestic output and the middle class.

But Jason Draho, the head of asset allocation Americas at UBS GWM, isn’t confident that tariffs are the best tool to achieve those aims.

“By introducing tariffs potentially at a significant level, at a minimum, you’re disrupting supply chains and throwing things off,” Draho said in a recent interview. “So that’s a negative supply story. That’s why it’s bad for growth and it’s bad for inflation. And so that’s not unlike what happened during the pandemic, when supply chains got all messed up — you had this inflationary shock.”

Higher prices could be transitory since there’d be a one-time adjustment for tariffs, Draho said, though those were nearly the Federal Reserve’s famous last words during the early 2020s.

“To me, it’s not so much stagflationary as that you end up just having lower growth and lower inflation when it’s all said and done — especially if you can’t do much in the terms of fiscal [stimulus],” Draho said. “You can’t shift demand higher. All you can try and do is make the supply side more efficient later on, which I think is still the policy of the administration.”

And even if inflation stays in check despite tariffs, that could be due to lower growth, Draho said.

‘Peak uncertainty’ might not last long — especially if Trump’s bluffing

But while markets are antsy about stagflation, a recession still seems unlikely for a few reasons.

Key economic indicators, from GDP growth to job additions, have been a bit soft but are far from contractionary territory. Corporate earnings, meanwhile, have been highly impressive.

Besides, what may be spooking investors most is how aggressive trade policy could affect businesses and consumers, which is easily controllable — unlike inflation or the pandemic. UBS suspects Trump will change course if his trade war is causing the US too much economic pain.

“We believe it would be politically counterproductive for the Trump administration to pursue policies that risk pushing the economy into recession,” David Lefkowitz, UBS GWM’s head of US equities, wrote in a mid-March note.

Investors hate uncertainty, often even more than bad news that’s clarifying. However, Draho thinks Trump is keeping other nations, and the market, in the dark to maximize his leverage.

Trade policy should become clear in early April, when Trump is expected to make a call on the reciprocal tariffs he’s teased, Draho and Lefkowitz indicated.

In the meantime, markets must grapple with “peak uncertainty,” in Draho’s words. Trump could opt for a universal tariff, put different levels of levies on nations with certain conditions attached, or scrap them altogether. In response, other nations could retaliate with harsh measures, work with Trump to restore trade relations, or agree to certain concessions before tariffs take effect.

This economic game theory may be dizzying, but Trump does have a dominant strategy, which Draho outlined in a recent note: follow through on his tariff pledges, and then adjust as needed.

“Doing so reduces the costly uncertainty,” Draho remarked. “And while tariffs bring their own economic pain, if they’re known, then consumers and businesses can at least plan accordingly.”

If all goes well, Trump can keep the economy afloat and fulfill the promises he campaigned on.

But the plan could easily backfire. Companies may rather bear the cost of tariffs, which could go away with a pen stroke, than invest unspeakable sums to revamp their supply chains. And even if businesses do build factories in the US, Draho said it would take at least 18 to 24 months to get them running, so the benefits might not materialize until the second half of Trump’s term.

“In the meantime, you could have significant [issues] to try and deal with higher costs,” Draho said. “That certainly flows through to the consumer. What’s the near-term pain you can tolerate for the hopes for longer-term benefits?”

So although Draho understands Trump’s tariff gameplan, he ultimately believes the president will be forced to adjust it — either by markets or voters.