Market Watch: How Trump’s Tariff Strategy Could Reshape This Rally

Ever since Donald Trump became the 47th U.S. president-elect this past Election Day, the stock market has been on a tear. Clearly, investors believe that his pro-growth policies will benefit both the U.S. economy and stock market over the next few years.

Now, thankfully, we don’t have to guess how a Trump presidency will impact stocks. We can just look back at how stocks did throughout 2017, 2018, and 2019 to determine how they may perform over the next few years. (Note: we’re excluding 2020 from this analysis due to the COVID-19 pandemic, a unique phenomenon unlikely to repeat in the next four years.) 

So – how did stocks do during Trump’s first term in office?

In short, they soared in 2017 on improved economic growth and lower taxes, then stumbled in 2018 as new tariffs caused reinflation. In 2019, stocks recovered as tariffs eased, inflation fell, and the Federal Reserve began cutting rates. 

And from where things stand today, a repeat of that performance seems quite possible. 

A Lookback at the Era of Trump 1.0

Specifically, in 2017, we saw an immediate acceleration in GDP from 2% to 4.6%. This caused some reinflation, but the market didn’t care much. Economic reacceleration was the story of the year; stocks soared. 

But then the first big batch of tariffs arrived in early 2018 – and everything changed. 

First, there were the 30% to 50% tariffs enacted on solar panels and washing machines in January. Then, in March, we got a 25% steel tariff and 10% aluminum tariff. Those escalated and expanded into June 2018. 

Steel prices spiked by about 50% in the first half of 2018. Aluminum prices jumped around 30%. The entire Bloomberg Commodity Index – a strong gauge of all commodity prices – rose about 10% in the first half of 2018, mostly due to the tariffs increasing prices and stalling global trade. 

And as a result, inflation started to become a problem once again. It rose from ~2% to ~3% in the first half of 2018, which forced the Federal Reserve to get more aggressive with its rate-hiking cycle. Indeed, the central bank hiked interest rates four times in 2018 to fight tariff-fueled reinflation.

Higher prices and higher rates weighed on the economy. GDP slowed from 4.6% at the end of 2017 to 0.6% at the end of 2018. 

The combination of higher prices, higher rates, and falling growth spooked investors and led to a violent ~20% market crash between September and December 2018.

In response to the market volatility and slowing growth conditions, the Fed stopped hiking rates in early 2019. Simultaneously, Trump started rolling back certain tariffs, particularly steel and aluminum tariffs on Canada and Mexico. 

Inflation eased. The Fed cut rates. The economy restrengthened, with GDP recovering to 4.8% by late 2019. And the stock market soared.