It would appear that the 2024 presidential election turned out much like that of 1992. It was “about the economy, stupid.” In other words it was about people’s finances. That being the case, how about a second Trump presidency and your finances? Will things be all rosy or will there be financial and economic pitfalls in store for all of us? How should you invest? Is there going to be a tsunami of tariffs that cost the average family as much as $4,000 a year in what will effectively be a poll tax? Of will Trump’s policies result in more onshoring of jobs and a resurgence of American manufacturing? For that matter, if Trump deports all of the illegal or semi-legal migrants, where will the workers come from and how will that affect your finances?
Trump Victory and Fed Rate Cut
The same day that we all woke up to the Trump victory, that same afternoon Fed Chair Powell announced another 0.25% interest rate cut. That day Bloomberg noted that investors could generally discount much what had happened but not all of it. The things that matter may matter a lot for your finances in the years to come and not all of them are all that obvious. The first thing to consider should be Trump’s promise of tariffs on pretty much everything imported into the USA and how that could affect specific investments. The Federal Reserve has intended to keep cutting interest rates as inflation cools but that approach could be stymied if the new administration’s policies cause more inflation.
Shades of Smoot and Hawley
For those who are not students of history of the Great Depression, Smoot and Hawley were members of the US Congress in 1930. Their goal was to protect US farmers and businesses from foreign competition as the stock market plummeted and a recession loomed. The Smoot-Hawley Tariff Act of 1930 raised already-high US tariffs on foreign goods by roughly 20% and caused other nations to enact similar tariffs on US exports. Trade between the US and Europe fell by about two-thirds as did all global trade within the next two to four years. Although tariffs were lowered during the following Roosevelt administration the financial damage of the Smoot-Hawley tariffs is generally considered to have turned a really bad recession into the Great Depression.
Smoot Hawley and the Great Depression Courtesy of Britannica
Will Tariffs Help or Hurt Your Investments?
This writer is old enough to have had a father who was a small-town businessman when the stock market crashed in 1929, and the country started slipping into a recession and then depression. He talked about how the men who took their lunch (coffee breaks were not all that common) at the café across from his Main Street office poo-pooed how businesses were failing in New York and investors were (allegedly) jumping out of skyscraper windows. All of that nonsense in New York was never going to affect things here in the heartland of America. A couple of years later businesses were trading goods for services because nobody had any money. Farmers were selling dried corn cobs for fuel (cheaper than coal) because the price of corn, soybean, wheat, etc. had fallen so low. My father, whose business shrunk but survived, often found excuses to hire men for the going wage of $1 a day to do chores that he would normally have done himself on weekends or evenings so that they could scrimp by and buy food for their families.
The point of this little trip down memory lane is that it can be difficult to judge how things like high tariffs will affect your finances in the medium and longer term even when they might seem to be useful on the face of things right now.
The Case for Tariffs on Chinese Electric Vehicles or Solar Panels
If you wonder why Elon Musk was running around Pennsylvania giving away money as he campaigned for Trump, look at how Tesla stock rose by a third after Trump’s victory. Aside from adding to Musk’s fortune, high tariffs on things like electric vehicles, solar panels, or even lithium batteries make sense to a degree. These are profitable products that the US and the world will need and use more and more in the years to come. To the degree that China subsidizes their key industries they have the capacity to drive US companies out of business much like John D. Rockefeller did in the oil sector when he controlled the Standard Oil Trust more than a century ago. If Testa, GM, Ford and others are to develop viable EV businesses employing American workers, a reasonable amount of tariff protection may be in order.
The flip side of the equation is that world trade is so integrated that many US companies rely on parts that are made elsewhere in the world and not by any US-based supplier. These US companies will end up paying more for the parts that they import, increase the costs of their products and services, and pass those costs on the consumers. The idea of tariffs is to encourage someone in the USA to pick up the slack and produce those parts now only made offshore. That, however, may take months or, more likely, years in many cases.
Investors will be wise to consider how adding costs to the supply chain will affect businesses that they want to invest in. In this regard investors will want to note that Musk has been very diligent in creating internal supply chains wherever he does business which would likely help insulate Tesla from the effects of tariffs while helping them, as well as other US EV manufacturers, by making competing Chinese vehicles overly expensive.
Tesla Cyber Truck Courtesy of Tesla Web Site
Do High Tariffs Cause Inflation?
An issue that arose during the presidential campaign was the potential cost of $2,600 to $4,000 per household as businesses would pass on the cost of tariffs to consumers. Because this widespread cost would be based on purchases and not income it was framed by the Harris campaign as a poll tax. No matter how one frames the issue it would raise the cost of living for pretty much everyone. Estimates of how high Trump tariffs, deportation of migrant workers, and bullying the Federal Reserve could potentially raise inflation are as much as up into the 6% to 9% range. The issue for one’s finances is that inflation returns and the Fed will need to raise interest rates, again risking a recession which might not end up like the current soft landing that the Fed as currently achieved. With a recession, financial damage would be spread across virtually all areas of investment and not just specific industries such as with the issue of tariffs and the supply chain.
What Are Some Defensive Investments in the Event of a Recession?
Cash, gold, and bonds are typically good bets during a recession. In the world of stocks, Walmart, big pharmaceuticals, home entertainment like Netflix, and big tech companies without the need to import from China or anywhere else to do business and sell their products. In fact, defense stocks are likely going to be good bet as the US ramps up to compete with China and replace stocks drawn down due to the wars in Ukraine and the Middle East.
In the event that Trump’s administration handles tariffs and everything else perfectly, look for a booming stock market, crazy levels for Bitcoin, and historically low levels of unemployment. We can only hope!