The stock market selloff continues to intensify, with stocks down 6% on Friday on top of Thursday’s losses. This was an unforced error on Trump’s part. He cannot blame the left for this.
One way to frame this is that Trump is running a sort of experiment on the US economy. He picked the most opportune timing: at the beginning of a lame-duck presidency. The worst that can happen is his approval ratings fall a lot, but it’s not like he risks losing, unlike in 2016-2020. If things go south, he has plenty of time to reverse course, such as the federal reserve cutting interest rates and with stimulus. This is why I’m still bullish on stocks. If the stock market and economy ends on a high note come the 2028 elections, by that point everyone will have long forgotten about the crash of early 2025. So Trump still has plenty of time to undo any damage and put this experiment behind him.
As I wrote a couple days ago, any predicted deleterious effects of the tariffs are overstated, and this also represents an overreaction by the stock market. Prices may see a smallish bump across some sectors, but it will not hurt consumer spending much. CPI may see a one-time noticeable jump, but the recent surge in treasury bonds suggests deflation is a bigger concern than inflation, indicating that such inflation will be temporary/transitory.
Overall, the tariffs are net-negative even if some sector benefit. Any increase of domestic manufacturing or job creation will be negated by losses elsewhere. This is why the market’s reaction was so negative. Moreover, companies are not going to suddenly start returning jobs America and building domestic factories, for two reasons:
First, as stock prices crash and earnings fall, this means less capital to invest in overhead, like factories and labor. An economy that is struggling cannot create domestic jobs as readily as an economy that is thriving. Companies that are struggling are more inclined to lay off workers instead of hire. As the overall economy grows, both domestic and overseas jobs are created–it’s not like it has to be all or nothing. An obvious example is Apple, which employs many Americans despite also having a huge overseas presence.
Second, factories are very capital-intensive and are a long-term commitment. Trying to overhaul the economy to accommodate tariffs will take time and money. But there is a decent possibility that Trump will backtrack or even that Congress will intervene. So businesses are going to be disinclined to invest this time and money when the horizon is so short. Instead, they will just do nothing and patiently wait for the tariffs to be rescinded or Trump to leave. This is why the tariffs will not save rural America of bring jobs back to America, just as they didn’t during Trump’s first term. (Any jobs, however few, created by the tariffs will be negated by losses elsewhere in the economy.)
Also, there is a narrative that only the elite oppose tariffs or are defending the stock market.
This is wrong. It’s anyone with a 401k or other stock account, who is now 10+% poorer this week. As of recent data, “there are roughly 70 million Americans participating in 401(k) plans, holding almost $9 trillion in assets.” This is hardly the ‘financial elite’. Elon Musk can afford to lose billions to defend an ideology or play politics. Ordinary people nearing retirement cannot.
Making society collectively poorer to prop up ‘rural workers’ is no less harebrained than the Covid policy response, except now the parties are reversed. This is no different than the Covid lockdowns, in which preventing some elderly deaths meant inconveniencing the productive masses and shutting down the economy and businesses.
Overall, I still think the stock market will quickly recover and that the economic fallout of the tariffs will not be as bad as expected, but still, it’s hard to paint this in a positive light. The stock market sure is not buying it.