Trump’s bold move to use emergency powers for tariffs?! Here’s why investors are freaking out 😳

President-elect Donald Trump’s potential use of the International Economic Emergency Powers Act (IEEPA) to enforce new tariffs has captured the attention of financial markets. The IEEPA grants the president authority to manage imports during declared emergencies, allowing for swift tariff implementation without the need for legislative approval. Historically, the IEEPA has been invoked for national security and foreign policy reasons, such as sanctions against hostile nations or entities. Trump’s consideration of using it for economic purposes reflects a notable shift in its application, raising questions about its broader implications for trade policy and executive power. This strategy highlights Trump’s commitment to fulfilling his campaign promises on trade, aiming to bolster domestic industries by discouraging reliance on foreign imports.

Market Reactions

Bond Yields

The possibility of new tariffs has driven bond yields higher, signaling investor concerns over inflationInflation refers to the rate at which the overall price levels of goods and services increase, gradually reducing purchasing power over time. It is commonly measured using indices …, increased government borrowing costs, and the broader economic impact of protectionist policies. Higher bond yields typically indicate market skepticism about economic stability, prompting investors to seek clarity on fiscal strategies.

Stock Market

Stock markets have shown mixed reactions to the news. While certain industries stand to benefit from domestic protectionism, the overall sentiment remains cautious. Indices like the S&P 500 have experienced fluctuations as investors weigh the long-term implications of these potential policies. During previous tariff announcements in Trump’s first term, the S&P 500 showed initial declines followed by sector-specific recoveries, particularly in industries benefiting from domestic-focused policies. This historical context helps investors gauge possible market responses to similar future events. Companies in the manufacturing, retail, and energy sectors are particularly under scrutiny as they assess their exposure to higher import costs.

Currency Movements

The U.S. dollar has exhibited volatility, initially strengthening on expectations of protective trade policies but also facing potential risks. If global trade relations deteriorate, the dollar could experience significant fluctuations, further complicating economic forecasts for both investors and policymakers.

Economic Implications

Inflation Concerns

Economists broadly agree that tariffs tend to be inflationary, as they raise the cost of imported goods. Businesses often pass these increased costs onto consumers, reducing overall purchasing power. This is especially concerning for goods that heavily rely on imports from nations like China, Mexico, and Canada. Higher consumer prices could dampen economic activity and strain household budgets.

Economic Growth

While some proponents argue that tariffs protect domestic industries, the general consensus suggests a negative impact on real GDP growth. Increased costs, potential trade disruptions, and retaliatory tariffs from trading partners could stifle economic expansion. Moreover, policy uncertainty might discourage business investment, further impeding growth prospects.

Trade Relations

The potential for escalating trade wars poses a significant riskIn stock trading, risk refers to the possibility of losing some or all of the capital invested in a trade. It represents the uncertainty about the future performance of a stock and… to global economic stability. Retaliatory measures from other nations could disrupt international trade flows, creating inefficiencies and forcing companies to reconfigure their supply chains. For example, during the U.S.-China trade conflict in 2018, many businesses faced increased costs and logistical challenges, prompting several to relocate production to countries like Vietnam and Mexico to mitigate tariff impacts. Such a scenario would likely lead to reduced competitiveness for U.S. exports and broader economic consequences.

Political and Legal Considerations

Legal Challenges

The use of emergency powers for economic purposes is likely to face legal scrutiny. Critics argue that such moves could exceed the intended scope of the IEEPA, potentially sparking challenges from business groups, legal experts, and international partners. Historical examples, such as challenges to tariffs imposed during past administrations, demonstrate that legal disputes can significantly delay policy implementation and create prolonged uncertainty for businesses and markets.

Political Reaction

From a political standpoint, this shift toward protectionism might alienate key allies and trading partners. Domestically, it could polarize public opinion, particularly in regions heavily dependent on international trade. While fulfilling campaign promises might bolster support among certain voter bases, it risks sparking broader economic and diplomatic tensions.

Sector-Specific Impacts

Retail and Manufacturing

Industries heavily reliant on imports, such as retail and manufacturing, could face significant challenges. Companies like Five Below, Crocs, and Skechers, which depend on cost-effective supply chains from China, may encounter higher costs. These increases could either squeeze profit marginsIn the dynamic world of business, profitability is a fundamental metric that encapsulates a company’s ability to generate earnings from its operations. Profit margins, expressed as… or lead to higher prices for consumers, potentially reducing demand and impacting overall profitability.

Energy and Commodities

The integrated North American energy market makes the energy sector particularly sensitive to tariff-related disruptions. Imposing tariffs on Canadian and Mexican goods could drive up energy prices, affecting both producers and consumers. Industries such as oil and gas may experience operational inefficiencies, leading to higher costs and reduced competitiveness in global markets.

Investor Sentiment

Short-Term Volatility

Financial markets are bracing for short-term volatility as they react to the potential implementation of new tariffs. Sectors with varying levels of import dependency will likely experience differing impacts, creating opportunities and risks for investors. Companies well-positioned to benefit from protectionist policies may see their stock prices rise, while those reliant on foreign supply chains could face declines.

Long-Term Strategy

In response to potential tariff impositions, businesses are likely to accelerate efforts to diversify their supply chains. Companies like Apple, which has increased production in India and Vietnam, and Walmart, which has expanded sourcing from multiple countries, are notable examples of firms proactively mitigating risks associated with trade conflicts. This trend, which began during Trump’s first term, aims to reduce dependency on specific countries and mitigate risks from trade disruptions. Investors should closely monitor companies making significant strides in supply chain diversification, as these firms may be better equipped to navigate an increasingly protectionist global trade environment.

Institutional Investors Reaction to Potential Trump National Emergency Powers

Institutional investors have varied reactions to Trump’s consideration of declaring a national economic emergency to implement new tariffs, reflecting the complexity and multifaceted impact of such a policy:

Concerns and Criticisms:

• Market Volatility: Many institutional investors are worried about increased market volatility and uncertainty. The news of potential new tariffs, especially if enacted through an emergency declaration, could disrupt markets, leading to unpredictable movements in stock prices, bondsUnited States Treasury securities are debt instruments issued by the United States government to finance its spending. Treasury securities come in a variety of forms, including bil…, and currencies. This is reflected in the immediate market reactions with stock futures slipping and bond yields rising.
• Economic Growth: There is a significant concern that these tariffs could stifle economic growth. By increasing the cost of imports, tariffs can lead to higher consumer prices, reduced consumer spending, and a potential decrease in GDP growth. The unpredictability of Trump’s tariff policies, particularly if they bypass traditional legal frameworks, adds to the worry about long-term economic strategy.
• Trade Relations: Institutional investors are apprehensive about the deterioration of international trade relationships. Tariffs on allies like Canada and Mexico could prompt retaliatory measures, further complicating global trade dynamics and potentially leading to a broader trade war, which could negatively impact multinational corporations and global supply chains.

Potential Positives:

• Negotiation Leverage: Some investors see the threat of tariffs as a negotiation tool. Trump’s past use of tariffs has sometimes led to concessions from trading partners, which could be viewed positively if it results in better trade terms for the U.S. or addresses issues like intellectual property theft or trade imbalances.
• Domestic Industry Support: There’s a segment of investors who might support tariffs if they believe they could protect or revive domestic industries, especially those in manufacturing sectors that have been hit by global competition. This perspective is often linked with a strategy to reduce reliance on foreign supply chains, which gained traction during global supply chain disruptions.

Strategic Considerations:

• Portfolio Adjustments: Many institutional investors are likely reevaluating their portfolios, considering how to hedge against potential policy impacts. This includes looking at sectors that might benefit from protectionism (like domestic manufacturing) or those that could be adversely affected (like retail or companies heavily reliant on imports).
• Long-term Planning: The unpredictability of such policy moves leads investors to focus on long-term strategies that can weather or take advantage of policy shifts. This includes diversification, investing in more resilient sectors, or even looking into assets like commodities, which might benefit from inflationary pressures if tariffs lead to higher prices.
• Political RiskIn stock trading, risk refers to the possibility of losing some or all of the capital invested in a trade. It represents the uncertainty about the future performance of a stock and… Assessment: The consideration of an economic emergency declaration is also prompting investors to reassess political riskIn stock trading, risk refers to the possibility of losing some or all of the capital invested in a trade. It represents the uncertainty about the future performance of a stock and…, not just in the U.S. but globally, as countries might respond with their policies. This could lead to a reevaluation of international investments and a shift towards more domestic-focused strategies.

In summary, while some institutional investors might see strategic advantages in certain scenarios, the overarching sentiment leans towards caution due to the potential for increased costs, trade disruptions, and economic slowdown. The exact impact would depend on the specifics of the tariffs, the response from trading partners, and how the market adapts to the new policy environment.

Looking Ahead

The consideration by President-elect Trump to declare a national economic emergency for imposing tariffs marks a critical juncture for financial markets and global trade. This move has far-reaching implications, influencing bond yields, stock performance, currency stability, and sector-specific dynamics. For investors, understanding the potential impacts on industries like retail, manufacturing, and energy is crucial to making informed decisions. As markets brace for policy announcements, monitoring companies with resilient supply chains and strategic positioning will be key to navigating this complex economic landscape.

Lance Jepsen is the senior personal finance writer for Guerilla Stock Trading who has spent more than 25 years covering the stock market and economics. In addition, Lance has worked as a private stock analyst for a number of high worth individuals.

Latest posts by Lance Jepsen (see all)