All good things must come to an end. The current stock market boom will, too.
Up, up, and away. That’s been the story for the stock market this year. The bull market shifted to an even higher gear after last week’s election of Donald Trump as the next president.
When everything is going great in a movie, you know something’s about to happen to end the smooth sailing. Real life isn’t always like the movies, but Wall Street could be about to get a big dose of Hollywood.
I predict the Trump stock market rally is doomed. Why? There’s one simple reason.
Image source: Getty Images.
Falling dominoes
I think the Trump stock market rally will end because of Trump. In particular, stocks will suffer (eventually) because of Trump’s tariffs. The president-elect has pledged to impose 10% to 20% tariffs on all imports into the U.S. and wants tariffs of between 60% and 100% on all Chinese imports.
The stock market probably won’t slam on the brakes immediately after tariffs are enacted. What will happen almost immediately after across-the-board tariffs are imposed, though, is that the prices of many goods purchased by Americans will increase significantly.
The countries that export goods to the U.S. don’t pay tariffs; the U.S. companies that import the products do. These companies could absorb some or all of the extra costs. However, many will choose to pass the costs along to their customers, instead.
Couldn’t customers buy U.S.-made products as an alternative? In some cases, yes. But not every product will have a U.S.-made alternative. Also, it’s possible (if not probable) that U.S. companies will increase their prices, too.
Suppose you run a U.S. company that sells widgets for $100. If the products made by your main rival, a foreign company, now cost customers $120, it would be very tempting for you to raise the price of your widgets to, say, $115. You’ll still have a lower price than your competition but could boost your revenue considerably.
Tariffs will almost certainly lead to higher inflation. The Federal Reserve isn’t likely to continue cutting interest rates with inflation again threatening and could even be forced to raise rates again. Consumers could also curtail their spending because of the sudden spike in prices. The situation would get even worse if other countries enacted retaliatory tariffs and ignited a full-blown trade war that hurts U.S. exporters.
Picture a line of dominoes. The first one labeled “tariffs” falls and knocks down the next domino labeled “inflation.” This domino knocks down the next in line with “interest rates” printed on it. The final domino that falls represents the stock market.
The Achilles’ heel of this prediction
The dominoes analogy also highlights the Achilles’ heel of my prediction. All the dominoes won’t fall if the first domino doesn’t knock down the second domino. I’m assuming the current stock market rally is doomed because President-elect Trump will move forward with the tariffs he has promised to impose — but it’s possible he won’t.
Look for businesses to lobby aggressively to convince Trump to hold off on his tariffs. Countries that trade with the U.S. will likely make attempts to avoid tariffs that could potentially hurt their economies.
Another possible scenario is that Trump’s tariffs are implemented, but with lots of loopholes. If there are enough exemptions for specific countries and/or products, the net impact of the tariffs could be much lower than anticipated. Alternatively, Trump could put the full-blown tariffs in place but lift them quickly enough to avoid causing significant harm.
What should investors do?
Let’s suppose, though, that Trump does what he has said he will do and implements steep across-the-board tariffs. What should investors do? The best answer is the simplest one: Invest for the long term.
Warren Buffett once said, “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.” Buy stocks that pass this Buffett test. And if you’re going to need your money in less than 10 years, stocks might not be your safest bet, anyway.
The reality is that all stock market rallies are doomed to end at some point. However, if you’re a long-term investor, you know more rallies will come.