The discussion of tariffs is usually based on political leanings rather than economics. Previously ardent free-trade advocates are now firmly in favor of protectionism. And many politicians who have spent their entire careers fighting unions, the minimum wage, and the NLRB are now very interested in the fate of American workers.

Most of you are now feeling angry, either because I have mis-characterized your team or pointed out the inconsistency of your opposition. This is my point. It is very easy to let emotions override analysis here. This won’t help your investing. As always, be very careful to stick to real numbers and examples in cases like this.

While tariffs can be sold as a way to punish foreign countries, they are really a sales tax on domestic consumers. Importers pay the tariff and then pass on the cost by raising prices. This will raise inflation. And higher inflation is a bad thing for stocks (a topic for a future blog). Commodity prices in particular tend to increase. The effect of this is mixed. For example, higher oil prices tend to hurt stocks, but higher lumber prices seem to help.

Lastly, production will be moved onshore, creating jobs and boosting incomes. In isolation, this is good for stocks. But this takes years. Ford doesn’t have factories sitting idle that can be restarted instantly. And the workers also need to be trained.

So, the theory seems to say that short-term effects on the market will be bad, but the long term could possibly be good.

Now, let’s look at some historical cases.

In 1928, Herbert Hoover campaigned on a protectionist platform, promising to help American farmers. Tariffs on some goods were levied as soon as he was sworn in. In May of 1929, the house passed the Smoot-Hawley bill which would place tariffs on over 25,000 agricultural and industrial exports. The senate didn’t pass their version until 1930, so it is a reach to blame the stock market crash of October 1929 directly on the tariffs, but they certainly didn’t help. Other countries retaliated and global trade dropped by over 60%. The market declined until July of 1932 and didn’t reach new highs until the end of 1954.

George W. Bush imposed steel tariffs on March 20, 2002. Over the next year, manufacturing lost 475,000 jobs. From March 2002 to May 2003 the S&P 500 lost $2 trillion in market cap.

In January 2018 President Trump announced tariffs on China. China responded by doing the same thing. He also imposed tariffs on steel and aluminum imports from Mexico, Canada and the European Union. Canadian lumber was also targeted. The market retreated and didn’t recover until August.

Three pieces of anecdotal evidence don’t add up to much. And, as always, nothing happens in isolation. In each case, many other factors will also have influenced the market. But based on the little theory and history that we have; tariffs are a bearish factor.

Disclaimer

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