The aftermath of the U.S. Presidential election remains ablaze with fiery discussions about potential trade policy repercussions. President-elect Trump’s tariff threats have stirred anticipation among analysts and observers, prompting a whirlwind of speculation about the impending consequences on asset prices.
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Academic Disdain for Tariffs:
- Economists overwhelmingly condemn tariffs for a multitude of reasons, primarily because they benefit a select few at the expense of the larger populace, potentially stunting long-term economic growth.
- Financial Market Reactions to Tariffs:
- Research delves into financial market reactions to targeted tariffs in 2018 and 2019, revealing that large-cap U.S. stocks experienced a negative response to tariff announcements. When tariffs were put into effect, stocks tended to plummet temporarily.
- Extending this analysis to small-cap U.S. equities and small-cap equities in major foreign markets, the impact illustrated a negative response to tariffs domestically and internationally.
- Safe assets, like the U.S. 10-year Treasury, served as a haven for protecting capital during tariff announcements, while volatility in the U.S. stock market reverted to pre-tariff levels swiftly post-tariff imposition.
- These outcomes were unlikely to stem from mere chance, signaling the profound influence of tariffs on economic landscapes.
Embarking on a similar yet simplified approach using Rand data from Yahoo Finance and FRED, an in-depth analysis of tariff implications unfolds, examining the significant effects observed across different asset classes in response to tariff announcements.
What Unfolded on Tariff Day?:
Table 1. Tariff Impact Analysis for 2018 and 2019:
| Date | S&P 500 (%) | Russell 2000 (%) | FTSE 100 (%) | DAX (%) | Nikkei 225 (%) | Hang Seng (%) | VIX (%) | 10-year Treasury (%) |
|---|---|---|---|---|---|---|---|---|
| 2018-01-23 | 0.217 | 0.345 | 0.213 | 0.712 | 1.292 | 1.659 | 0.070 | -0.030 |
| … | … | … | … | … | … | … | … | … |
In summary, tariff announcements consistently coincided with market downturns, rising prices of safe assets like the 10-year U.S. Treasury, and spikes in expected volatility, reaffirming previous research findings.
Estimating the Effect:
Running linear regressions and examining the means of changes brought about by tariffs versus non-tariff days, the significance of tariff-induced impacts is reaffirmed through models evaluating daily changes stimulated by tariff announcements.
Table 2. Regression Findings:
| Dependent Variable | S&P 500 | Russell 2000 | FTSE 100 | DAX | Nikkei 225 | Hang Seng | VIX | 10-year Treasury |
|---|---|---|---|---|---|---|---|---|
| Tariff | -1.321*** | -1.258** | -0.605* | -1.022*** | -0.818* | -0.585 | 2.273*** | -0.053*** |
| Constant | 0.062** | 0.045 | 0.013 | 0.038 | 0.033 | -0.019 | -0.011 | 0.001 |
| Observations | 1,743 | 1,743 | 1,679 | 1,689 | 1,549 | 1,589 | 1,743 | 1,742 |
| R2 | 0.006 | 0.004 | 0.002 | 0.004 | 0.002 | 0.001 | 0.007 | 0.005 |
These results reinforce the adverse impact of tariffs on stocks in the immediate aftermath, establishing a correlation between tariff announcements and stock market downtrends.
In a climate of trade policy uncertainty, these analyses shed light on the ramifications of tariff threats, urging a vigilant perspective on economic stability amidst the turbulence engulfing global markets.
