Tariff Turmoil and Tacos

The Court of International Trade has invalidated a large portion of the Trump tariffs but the story is far from over. The three judge-panel ruled that the President did not have the power to authorize tariffs under the International Emergency Economic Powers Act of 1977 (IEEPA) and that the executive orders that were announced on April 2nd are “invalid as contrary to law.” The ruling applies to the baseline 10 percent tariff, the reciprocal tariffs, which are currently paused), the 20 percent fentanyl-related tariffs on China and the 25 percent fentanyl tariffs on non-USMCA compliant imports from Canada and Mexico. The previously announced tariffs on steel, aluminium and motor vehicles were imposed under different trade laws, so they will remain in place.

The Administration has begun the process of appealing the decision to the U.S. Court of Appeals for the Federal Circuit, and if it loses there, it could take the case to the Supreme Court. The U.S. Court of Appeals for the Federal Circuit said that the tariffs can remain in effect during the appeals process. Meanwhile, White House lawyers will likely find other ways to maintain tariffs, ways that do not rely on IEEPA.

What does the most recent round of tariff turmoil mean for businesses, consumers, the Fed, and investors? Unfortunately, this is just another layer in our uncertainty cake. Without clarity, companies are still left operating amid a haze of ambiguity, which makes it hard to determine whether or not to invest in a new project or make new hires. Consumers should still brace for higher prices and a slowing economy, at least in the near term, while the Fed is even more likely to stay on the sidelines until the appeals process proceeds and/or the Administration finds other ways to reimpose tariffs.

When it comes to investors, news of the court ruling was initially met with cheers, though by the end of the day, the buying was more muted. But even before that announcement, stock investors appeared to be looking beyond tariffs and focusing on the factors that drove markets higher after the election, that is, the A-I spending spree, tax cuts, and deregulation.

Writing in the Financial Times, Robert Armstrong has created an acronym that has now become commonplace among traders: The TACO Trade. The recent stock market rally has been fueled by the idea “that the U.S. administration does not have a very high tolerance for market and economic pressure, and will be quick to back off when tariffs cause pain. This is the Taco theory: Trump Always Chickens Out”.

TACOs aside, now that the U.S. stock market has seen an almost 20 percent reversal from recent lows (April 8), there is fresh evidence that very few can predict which stocks will do well under a variety of circumstances and when to jump in or out of the market as a whole. According to research from S&P SPIVA, over the past 15 years, about 90 percent of active stock managers have underperformed their benchmarks across all strategies. In other words, you need not attempt to time the market. You can stick to the tried and true strategy of creating a financial plan, allocating your assets across a diversified group of index funds, and not messing with the plan unless something in your life changes.