The first month of President Trump’s term has been partly focused on announcing trade tariffs on other nations. Yet the ambiguity around how these will be implemented, along with the changing rhetoric from him, has provided a high level of volatility on both the US and UK stock markets.
Yet even in just a short period of time, something has caught my eye as to why I feel the trade policy won’t cause a stock market crash.
Buying the dip
We’ve had three dips on the S&P 500 so far in relation to tariffs. The first came at the end of January, when it appeared that 25% tariffs were going to be imposed at the start of February on Canada and Mexico. Yet just a couple of days later, the US agreed to delay the tariffs on Canada for 30 days after negotiations. He also paused the tariffs on Mexico in response to actions from their government. As a result, the stock market swiftly rebounded.
There were two other dips I noted over the past two weeks, which were again associated with chatter around imposing tariffs. Last week, Trump hyped up a meeting on Thursday where reciprocal tariffs were due to be announced. Yet this turned out to be relating to actions that won’t come into effect until April.
Again, the market rebounded. This leads me to think that even though the market will be volatile going forward, it could be a case that most of this trade concern is hot air. Of course, the risk is that something material does get introduced, which could negatively impact a particular sector. This could spark a broader market sell-off, triggering a crash.
An area of concern
For example, I’d consider staying away from General Motors (NYSE:GM). The share price is up an impressive 24% over the past year. However, if 25% tariffs on Mexican and Canadian auto imports are brought in, it could face significant challenges.
This is because it relies on supply chains that span out of the US. It imports things like engines and electrical components from these countries. The tariffs would increase the costs for these essential parts. It would thus make vehicle production more expensive.
From this, GM would have two main options. Either absorb the costs, reducing profit margins, or pass the higher costs onto customers, potentially reducing demand.
Neither outcome is great for the company, and I feel that the share price could tumble if such measures are introduced. Other US car manufacturers could struggle as well. Interestingly, foreign automakers could win from this. For example, Toyota produces a lot of cars in America, but doesn’t import much from Mexico or Canada.
Of course, GM stock could do well if Trump get agreements from the other nations and doesn’t implement import restrictions.
My game plan
As we currently stand, the concern around tariffs hasn’t caused the market to crash. I’m going to keep investing as normal, but would be steering clear of companies that could be negatively impacted if Trump does implement aggressive tariffs.
Until we get more clarity, I think it’s the smart, risk-conscious thing to do.
This post was originally published on Motley Fool
