Tariff Turbulence

President Trump’s planned imposition of tariffs on steel (25%) and aluminum (10%) rocked an already wobbly stock market yesterday as worries over a potential trade war heated up. Amid the headline noise, there a few key pieces of this story to keep in mind:

  • Steel and aluminum account for roughly 2% of world trade, so the direct impact on the global economy would be small.
  • Despite the headlines, China is not a major exporter (~3%) of steel to the U.S.
  • The primary beneficiaries are steel companies in the U.S., which make up a small portion of overall equity market capitalization.
  • The auto industry stands to lose, as they are already facing slower sales and rising interest rates as headwinds.
  • Approximately six million people work in steel-dependent manufacturing fields in the U.S., and legislators will fight to protect them along with their own re-election prospects in the coming months.

Fears of inflation accompany tariffs, as higher import levies may serve as de facto consumption tax, pressuring output. Initial estimates suggest that tariffs, if enacted and sustained over the course of one year, could reduce GDP by up to 0.25% this year. Despite this possibility, it is important to remember that the S&P 500 Index was just up 15 consecutive months and some volatility is quite normal at this stage of the economic cycle. Also, the U.S. economy is still experiencing multi-year highs in manufacturing, services, employment, and corporate profits.

According John Lynch, LPL’s Chief Investment Strategist: “Despite threat of tariffs and the parsing of Jerome Powell’s comments this week, and related market volatility, we maintain our view for three rate hikes, a trading range of 2.75% to 3.25% for the 10-year Treasury yield, and EPS gains of approximately 15% in 2018. This would translate to a fair value estimate of 2,950 to 3,000 for the S&P 500 Index by year-end*. Accordingly, we will continue to use any market weakness as opportunity to position portfolios toward value, small caps, financials, industrials, and technology.”

*Please see our Outlook 2018: Return of the Business Cycle publication for additional descriptions and disclosures.

IMPORTANT DISCLOSURES

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.

The economic forecasts set forth in the presentation may not develop as predicted.

All performance referenced is historical and is no guarantee of future results.

The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments, and exports less imports that occur within a defined territory.

Earnings per share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company’s profitability. Earnings per share is generally considered to be the single most important variable in determining a share’s price. It is also a major component used to calculate the price-to-earnings valuation ratio.

This research material has been prepared by LPL Financial LLC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Securities and Advisory services offered through LPL Financial LLC, a Registered Investment Advisor

Member FINRA/SIPC

For Client Use — Tracking # 1-705416 (Exp. 03/19)