By John Lau
December 2, 2024 – On Monday last week, after the close, President-elect Trump dropped a political “tape bomb” by threatening to levy 25% tariffs against Canada and Mexico and add an additional 10% tariff on China. The impact of the threat didn’t push the S&P 500 lower, but it did cause a mild drop in the “Trump trade” sensitive indices and sectors (industrials, materials, and energy) as the Dow Industrials and small caps were solidly lower following the open while the S&P 500 and Nasdaq were modestly higher. But the news didn’t weigh materially on the broader markets as one might expect, and this is why I think:
First, let’s be clear: If 25% tariffs were levied against Mexico and Canada, it would be a significant negative for markets as numerous industries import from Mexico and Canada, with the auto markets particularly exposed. Bottom line, these would be material headwinds on markets as they’d lower earnings expectations and boost inflation estimates (and Treasury yields).
The reason the market didn’t materially react to the threats, however, is simply because it doesn’t believe Trump will follow through with them, and here may be the reasons why.
First, Trump watches markets, and he knows that 25% tariffs on Mexico and Canada would cause a pullback (if not an outright correction). Trump views a strong stock market as a barometer of his economic policies and voter sentiment, and he is not likely to pursue policies that could derail the rally.
Second, while it was a provocative headline, Trump’s threat is actually nothing new as he had done it before. During his first administration, he threatened 25% tariffs against Mexico if they did not stop the wave of immigrants migrating from Central America towards the southern U.S. border. Mexico did address the migration, but the tariff threat was never fulfilled. Given this history, markets view the tariff increase as merely a threat designed to produce some sort of policy movement that addresses Trump’s reasons behind the threat: illegal immigration and fentanyl. Case in point: Trump had a call with the President of Mexico, Claudia Sheinbaum, on Wednesday (the day before Thanksgiving) and characterized the call as “productive,” while Canada announced measures to strengthen the border, thus easing trade tensions between the three countries.
Third, the legality of these threats is not totally clear and there would likely be legal challenges to any punitive tariffs from specific American industries. The U.S. already has a legally binding trade agreement in place with Canada and Mexico (the United States-Mexico-Canada Agreement, or USMCA), which Trump himself negotiated. The president of the United States does have wide authority on tariffs, but it’s not absolute, and whether these tariffs could be implemented without 1) exiting the USMCA and 2) extensive legal review is unclear.
The market is using Trump’s first administration as a guide for how to react to disruptive policy headlines, and the truth is that for all the tariff bluster from Trump in the first administration, very little was actually implemented.
Bottom line, we are all going to have to get re-accustomed to political “tape bombs” from Trump (such as the 25% tariffs on Mexico and Canada), but until the market believes his unorthodox or disruptive policies will actually be implemented, they may cause temporary volatility but won’t likely derail the rally.
As such, the outlook for a Santa rally into year-end remains generally positive. Growth remains “fine,” and a soft landing is likely; inflation isn’t spooking the Fed, and a rate cut in December is entirely possible. Combine all that with very positive seasonality (especially when markets are up this much YTD), and despite very stretched valuations, a grind higher into year-end remains entirely possible (if not likely).
Beyond Dec. 31, however, the outlook for markets will become more mixed as at least some of Trump’s tape bomb headlines will become policy, and the focus will turn to yields, tax cuts, the number of remaining rate cuts, trade, and growth. For now, investors see this as a 2025 problem, and the near-term road to a grind higher into year-end remains largely clear.
Please do not hesitate to contact us with any questions or comments or to schedule a portfolio review.
Our clients rely on us for timely information, and our job is to deliver.
Disclosures
Investment advisory services offered through Robertson Stephens Wealth Management, LLC (“Robertson Stephens”), an SEC-registered investment advisor. Registration does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. This material is for general informational purposes only and should not be construed as investment, tax or legal advice. It does not constitute a recommendation or offer to buy or sell any security, has not been tailored to the needs of any specific investor, and should not provide the basis for any investment decision. Please consult with your Advisor prior to making any investment decisions. The information contained herein was compiled from sources believed to be reliable, but Robertson Stephens does not guarantee its accuracy or completeness. Information, views and opinions are current as of the date of this presentation, are based on the information available at the time, and are subject to change based on market and other conditions. Robertson Stephens assumes no duty to update this information. Unless otherwise noted, any individual opinions presented are those of the author and not necessarily those of Robertson Stephens. Performance may be compared to several indices. Indices are unmanaged and reflect the reinvestment of all income or dividends but do not reflect the deduction of any fees or expenses which would reduce returns. A complete list of Robertson Stephens Investment Office recommendations over the previous 12 months is available upon request. Past performance does not guarantee future results. Forward-looking performance objectives, targets or estimates are not guaranteed and may not be achieved. Investing entails risks, including possible loss of principal. Alternative investments are speculative and involve substantial risks including significant loss of principal, high illiquidity, long time horizons, uneven growth rates, high fees, onerous tax consequences, limited transparency and limited regulation. Alternative investments are not suitable for all investors and are only available to qualified investors. Please refer to the private placement memorandum for a complete listing and description of terms and risks. This material is an investment advisory publication intended for investment advisory clients and prospective clients only. Robertson Stephens only transacts business in states in which it is properly registered or is excluded or exempted from registration. A copy of Robertson Stephens’ current written disclosure brochure filed with the SEC which discusses, among other things, Robertson Stephens’ business practices, services and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov. © 2024 Robertson Stephens Wealth Management, LLC. All rights reserved. Robertson Stephens is a registered trademark of Robertson Stephens Wealth Management, LLC in the United States and elsewhere.
Securities offered through Fortune Financial Services, Inc. Member FINRA/SIPC. Robertson Stephens Wealth Management, LLC and Fortune Financial Services, Inc. are separate entities and are not affiliated.
For information about Robertson Stephens, go to www.rscapital.com.
Trump’s Political “Tape Bombs” and the Santa Claus Rally
By John Lau
December 2, 2024 – On Monday last week, after the close, President-elect Trump dropped a political “tape bomb” by threatening to levy 25% tariffs against Canada and Mexico and add an additional 10% tariff on China. The impact of the threat didn’t push the S&P 500 lower, but it did cause a mild drop in the “Trump trade” sensitive indices and sectors (industrials, materials, and energy) as the Dow Industrials and small caps were solidly lower following the open while the S&P 500 and Nasdaq were modestly higher. But the news didn’t weigh materially on the broader markets as one might expect, and this is why I think:
First, let’s be clear: If 25% tariffs were levied against Mexico and Canada, it would be a significant negative for markets as numerous industries import from Mexico and Canada, with the auto markets particularly exposed. Bottom line, these would be material headwinds on markets as they’d lower earnings expectations and boost inflation estimates (and Treasury yields).
The reason the market didn’t materially react to the threats, however, is simply because it doesn’t believe Trump will follow through with them, and here may be the reasons why.
First, Trump watches markets, and he knows that 25% tariffs on Mexico and Canada would cause a pullback (if not an outright correction). Trump views a strong stock market as a barometer of his economic policies and voter sentiment, and he is not likely to pursue policies that could derail the rally.
Second, while it was a provocative headline, Trump’s threat is actually nothing new as he had done it before. During his first administration, he threatened 25% tariffs against Mexico if they did not stop the wave of immigrants migrating from Central America towards the southern U.S. border. Mexico did address the migration, but the tariff threat was never fulfilled. Given this history, markets view the tariff increase as merely a threat designed to produce some sort of policy movement that addresses Trump’s reasons behind the threat: illegal immigration and fentanyl. Case in point: Trump had a call with the President of Mexico, Claudia Sheinbaum, on Wednesday (the day before Thanksgiving) and characterized the call as “productive,” while Canada announced measures to strengthen the border, thus easing trade tensions between the three countries.
Third, the legality of these threats is not totally clear and there would likely be legal challenges to any punitive tariffs from specific American industries. The U.S. already has a legally binding trade agreement in place with Canada and Mexico (the United States-Mexico-Canada Agreement, or USMCA), which Trump himself negotiated. The president of the United States does have wide authority on tariffs, but it’s not absolute, and whether these tariffs could be implemented without 1) exiting the USMCA and 2) extensive legal review is unclear.
The market is using Trump’s first administration as a guide for how to react to disruptive policy headlines, and the truth is that for all the tariff bluster from Trump in the first administration, very little was actually implemented.
Bottom line, we are all going to have to get re-accustomed to political “tape bombs” from Trump (such as the 25% tariffs on Mexico and Canada), but until the market believes his unorthodox or disruptive policies will actually be implemented, they may cause temporary volatility but won’t likely derail the rally.
As such, the outlook for a Santa rally into year-end remains generally positive. Growth remains “fine,” and a soft landing is likely; inflation isn’t spooking the Fed, and a rate cut in December is entirely possible. Combine all that with very positive seasonality (especially when markets are up this much YTD), and despite very stretched valuations, a grind higher into year-end remains entirely possible (if not likely).
Beyond Dec. 31, however, the outlook for markets will become more mixed as at least some of Trump’s tape bomb headlines will become policy, and the focus will turn to yields, tax cuts, the number of remaining rate cuts, trade, and growth. For now, investors see this as a 2025 problem, and the near-term road to a grind higher into year-end remains largely clear.
Please do not hesitate to contact us with any questions or comments or to schedule a portfolio review.
Our clients rely on us for timely information, and our job is to deliver.
Disclosures
Investment advisory services offered through Robertson Stephens Wealth Management, LLC (“Robertson Stephens”), an SEC-registered investment advisor. Registration does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. This material is for general informational purposes only and should not be construed as investment, tax or legal advice. It does not constitute a recommendation or offer to buy or sell any security, has not been tailored to the needs of any specific investor, and should not provide the basis for any investment decision. Please consult with your Advisor prior to making any investment decisions. The information contained herein was compiled from sources believed to be reliable, but Robertson Stephens does not guarantee its accuracy or completeness. Information, views and opinions are current as of the date of this presentation, are based on the information available at the time, and are subject to change based on market and other conditions. Robertson Stephens assumes no duty to update this information. Unless otherwise noted, any individual opinions presented are those of the author and not necessarily those of Robertson Stephens. Performance may be compared to several indices. Indices are unmanaged and reflect the reinvestment of all income or dividends but do not reflect the deduction of any fees or expenses which would reduce returns. A complete list of Robertson Stephens Investment Office recommendations over the previous 12 months is available upon request. Past performance does not guarantee future results. Forward-looking performance objectives, targets or estimates are not guaranteed and may not be achieved. Investing entails risks, including possible loss of principal. Alternative investments are speculative and involve substantial risks including significant loss of principal, high illiquidity, long time horizons, uneven growth rates, high fees, onerous tax consequences, limited transparency and limited regulation. Alternative investments are not suitable for all investors and are only available to qualified investors. Please refer to the private placement memorandum for a complete listing and description of terms and risks. This material is an investment advisory publication intended for investment advisory clients and prospective clients only. Robertson Stephens only transacts business in states in which it is properly registered or is excluded or exempted from registration. A copy of Robertson Stephens’ current written disclosure brochure filed with the SEC which discusses, among other things, Robertson Stephens’ business practices, services and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov. © 2024 Robertson Stephens Wealth Management, LLC. All rights reserved. Robertson Stephens is a registered trademark of Robertson Stephens Wealth Management, LLC in the United States and elsewhere.
Securities offered through Fortune Financial Services, Inc. Member FINRA/SIPC. Robertson Stephens Wealth Management, LLC and Fortune Financial Services, Inc. are separate entities and are not affiliated.
For information about Robertson Stephens, go to www.rscapital.com.
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