Trump Tariffs A Thorn In The Side Of Investors?

Team Trump is doubling down with a 20 percent upward spike on auto imports and that could have a big impact on auto stocks and funds.

With trade and tariffs in the headlines, should advisors be taking a longer look at the impact of White House decisions on client portfolios, especially in high-profile industries like auto manufacturing and sales – both home and abroad?

A Chain Reaction

Economists and money managers aren’t especially thrilled with Team Trump’s aggressive stance on trade and tariffs, even if the goal is to balance out financial inequities between the U.S. and long-time trading partners.

Take the trade stand-off between the U.S. and China, which will trigger a “chain reaction of negative events around the world,” according to Nigel Green, founder of deVere Group, one of  the world’s largest independent financial advisory organizations.

Green, speaking just after President Trump announced a long list of new products that tariffs on $200 billion worth of goods from China will be levied against, said the economic downside of a trade war is much more realistic than the upside going forward.

“It is going to lead to higher inflation in the U.S, as import tariffs raise the cost of imported goods, while domestic producers find that they can increase their prices as foreign competition weakens,” he said. “This means interest rates will be hiked and the dollar will go up.”

China’s cheap goods have helped keep prices, and therefore U.S. and global inflation, low, but those days are coming to an end, Green stated. “To counteract increasing inflation, the U.S. Federal Reserve is even more likely to raise interest rates,” he said. “A jump in rates will, of course, strengthen the dollar.”

“In turn, a stronger dollar also increases stress in emerging markets, many of which have borrowed heavily in recent years in dollars and who now find interest and capital repayments on these loans have shot up in local currency terms,” he added.

Impact on the Auto Sector

That’s not good news for auto industry investors, who are still weighing the impact of the White House’s 20 percent tariff on auto imports.

Jason Pride, chief investment officer at Glenmede says that job loss is something to be concerned about.

“The Peterson Institute for International Economics, an established non-partisan economic think-tank in Washington, estimated that such a tariff, combined with retaliation from U.S. trade partners, could result in the loss of 624,000 U.S. jobs (in the auto sector,”) said Pride.

U.S. auto and vehicle manufacturers are already taking aggressive steps as the trade war escalates.

“Opposition to tariffs is gaining steam as the impact on particular industries is recognized,” said Pride.

One such opposition comes from Harley-Davidson who announced in June it would be moving its production of E.U.-bound motorcycles to Europe in order to avoid the E.U.’s recent tariff hike on motorcycle imports.

The Industry Sounds Off

The impending tariff has the industry responding.

“The majority of the steel and aluminum we directly purchase is from right here in the U.S.,” noted Toyota Motor in a statement. “Nonetheless, the administration's decision to impose substantial steel and aluminum tariffs will adversely impact automakers, the automotive supplier community and consumers as this would substantially raise costs and therefore prices of cars and trucks sold in America. The risk is for the end customer, who'll feel the financial impact because he'll probably pay more."

Or this from Volkswagen CEO Matthias Mueller: "I think the American government knows that in the past we had agreements like NAFTA that shouldn't just be destroyed on a whim,” he said in a statement. "We all put our efforts into globalization in the past decades, and I think we shouldn't give up that idea so easily."

Auto Funds Holding Steady

Auto industry stocks and funds aren’t showing any signs of wear and tear – at least, not yet.

Take the Invesco BLDRS (ADRA) Asia 50 ETF (which includes Toyota (TM), Honda (HMC) and Mitsubishi (MSBHY). That fund entered the last two weeks of June trading around $34 per share. One month later the fund hadn’t moved much, trading at $33 per share.

Another auto industry-heavy ETF, First Trust NASDAQ Global Auto ETF (CARZ), was trading at $39 per share on June 18, and has fallen slightly to $37 per share one month later – hardly a sign of heavy decline.

Individual auto stocks are stable, as well. General Motors (GM) has hovered in the $40-to-$41 range in the last month, while Toyota has traded in a tight range ($132 per share) over the same time period, as has Honda (at $30 per share.)

Uncertainty Rules?

Auto industry observers say that, while auto stocks and funds appear stable for now – that scenario could change quickly, based on comments and actions made by the Trump administration in the next several months.

“The biggest impact of Trump tariff hikes -- like almost everything Trump -- is the uncertainty it brings to the auto industry,” said Robert Johnson, president of the Fed Policy Investment Research Group. “It seems that with President Trump, the only predictable aspect is unpredictability. “For a President that many saw as friendly to business, it’s difficult for businesses to navigate the uncertainty.”

Most investors look at the immediate effects of imposing tariffs on imported goods and conclude that such an action will bolster domestic producers - the argument being that it raises the price of imports vis-a-vis domestic goods.  But, such a simplistic argument ignores the export market for U.S. goods. Johnson said.

“Retaliatory tariffs around the globe will raise the price of autos in aggregate and negatively impact demand,” he said. “Declines in demand translate into fewer autos sold and a lower value for auto stocks. This would result in layoffs at domestic automakers, less investment in plant and equipment and fewer dollars spent on research and development.”

Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms. Brian may be contacted at [email protected].

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