“Won’t tariffs tank the economy?”

My friend asked me this question after the U.S. election result last week. He wanted to hear Wall Street’s take on the president-elect’s economic plan…

During his campaign, Donald Trump promoted tariffs as a way to max out America’s economic power. But experts warn this strategy could stoke inflation and hurt consumers.

As usual, the truth is complex. So it’s important to look at the numbers…

With Trump headed back to the White House, tariffs could be a part of the national economy for years to come. And if that’s the case, the first 100 days of his presidency will be critical to your portfolio.

Let me explain…

Many of us haven’t thought about tariffs since high school… so let’s start with a quick refresher.

A tariff is a tax on imports. In theory, they boost American businesses by discouraging international competitors.

For example, say a grocer in California imports cheap avocados from Mexico. They sell like crazy, while the more expensive California-grown avocados languish on store shelves.

Now, let’s say the U.S. places a tariff on the Mexican avocados. This flat tax would be paid by the importing company… in this case, the grocer. And that would help neutralize the Mexican growers’ price advantage.

But critics say that tariffs often miss the target. That’s because companies usually find a way to pass costs on to consumers.

And that’s why Trump’s economic plan has economists spooked…

The president-elect has declared that he’ll cut taxes. But he also says he plans to install a tariff of between 10% and 20% on all imports… And he’ll slap an additional tariff of 60% to 100% on goods from China.

You might like these ideas, or you might not. Regardless, all of these actions are inflationary – tariffs in particular. And taken together, they could indeed damage the stock market.

My colleague Joel Litman discussed the inflationary nature of tariffs last month at the 2024 Stansberry Research Conference in Las Vegas…

Regular DailyWealth readers know Joel as the founder of our corporate affiliate, Altimetry. His institutional business, Valens Research, counts all 10 of the world’s biggest money managers as clients. And he routinely consults for the FBI and the Pentagon.

Joel built three models of the Trump economic plan to see what could happen. He started by singling out the low-tax environments over the past 100 years.

Then, he divided them into low-, moderate-, and high-inflation periods. We can think of each inflation bracket as an analogue for how high the government could set tariff levels.

Joel measured how each environment impacted the S&P 500 Index’s average price-to-earnings (P/E) ratio, which tells us the value of the stock market. The higher the ratio, the more stocks are worth.

Take a look at how inflation affected stock values over history when taxes were low…

Today, the S&P 500 has a P/E ratio of 27.5. The average valuation for a low-tax, deflationary period is 22.3… And the average for a low-tax, low-inflation period is 20.1.

Joel says either of these backdrops would likely support a bull run in stocks.

But a low-tax, high-inflation period would be disastrous for the market – and it could happen if we get too carried away with tariffs. According to history, 4%-plus inflation would slash today’s stock valuation to 13.5… a roughly 50% fall.

However, Trump’s team appears to know this. Some of Trump’s top supporters are starting to echo the anti-tariff chorus.

And at the same time, China has already shrugged off Trump’s tariff plan, at least publicly.

“Our policy towards the U.S. is consistent,” an official in Beijing said of Trump’s win at a press conference last week. “We will continue to view and handle China-U.S. relations in accordance with the principles of mutual respect, peaceful co-existence and win-win cooperation.”

So it could be that tariffs are simply a negotiating tactic…

But until the policy path becomes clearer, Joel urges investors to take precautions. The first 100 days of the new presidency will be key.

If Trump pushes his tariffs through and inflation starts rising, it may be a good time to get defensive with your portfolio holdings. But if inflation remains low for the first 100 days, you need to own stocks.

As Joel pointed out at the conference, every bull run in the past century has come from a low-tax environment.

In short, pay close attention to the economy after Trump takes office. History shows your portfolio could hang in the balance.

Good investing,

Sean Michael Cummings

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Source: Daily Wealth