Trump's Latest Trade Tweets May be Damaging Politically But Investors Should Ignore Them
There is an old, reputedly Russian, fable about a scorpion and a frog. In it, the scorpion is trying to cross a river and attempts to enlist the frog’s help. The frog is at first afraid that the scorpion might sting it but is convinced when he points out that if he did, they would both die.
Sure enough, halfway across the river, the scorpion stings the frog and they are both doomed. “Why?” asks the dying frog of the drowning scorpion, “You are now going to die as well.” The scorpion shrugs and says, “I can’t help it, I’m a scorpion.”
It seems this morning that President Trump is a scorpion. He has a propensity for chaos and confrontation, even when it doesn’t seem to be in his best interests.
There is a reason there are a seemingly endless parade of Democrats announcing their candidacy for 2020: they all believe that Trump is dead in the water. There are plenty of reasons to say that this represents a potentially dangerous over-confidence on their part, not least because 2016 taught just that lesson. Still, the one of the most convincing reasons not to be overconfident comes down to the old James Carville saying: "It’s the economy, stupid.”
As Trump himself keeps reminding us, the economy is doing well. Unemployment is at its lowest for decades, and growth is picking up. Friday’s jobs report showed that wages are rising faster than prices, and corporate profits are soaring. The major stock indices are, or rather were before this morning, at all-time highs.
Whatever the polls say now, history tells us that if this economic boom continues and Trump keeps hammering the point home, he has a great chance of re-election next year.
Then, on Saturday, came this:
If there is one thing that most economists agree could derail the economy, it is an extension, or worse still escalation, of the trade war with China. That is exactly what Trump’s tweets suggest, so it is hardly surprising that all major indices are indicating a big drop this morning. Creating that situation is not smart politically for the president in the short term, but investors should not panic.
If traders have learned anything from the Trump presidency thus far, it is that market reactions to presidential tweets should be faded at every opportunity. Just a few days ago, for example, Trump was saying that a deal was imminent and that was one of the things that enabled the push up through the previous highs.
It is now obvious that for those with a short-term view, opposing that move would have been smart. Why should this one be any different? It shouldn’t.
Investors should keep in mind that the first of Trump’s tariffs were imposed in January of 2018 and have escalated ever since. Yet, as mentioned, the economy is strong, and stocks are at or around record highs. One could argue that the fact that the S&P 500 is up only around 2.5% from the January 2018 high before the first shots were fired in the trade war shows the damage it has done, but that is even more reason to buy on this dip.
Economic data has shown consistent strength over that period, despite the Fed stopping their rate hikes, just in case. Even so, stocks are up only 2.5%; Warren Buffett said in a CNBC interview this morning that stocks are “ridiculously cheap.”
It may be that Donald Trump’s scorpion-esque nature will come back to bite him politically, but the evidence so far suggests that if it does, it will be because of his inability to stay on message, not because tariffs are causing an economic collapse. The economy is just too strong for that, as the last sixteen months have shown.
In that same interview, Buffett cautioned investors against reacting to headlines in general, pointing out that a good ten-year investment remains good no matter what those headlines say on any given day. That is good advice, but especially so when it comes to Trump’s tweets. There, the very inconsistency that makes them potentially damaging politically is what makes it safe for investors to ignore them.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.