US equity markets (QQQ) rose sharply after President Trump’s election in 2016. The uptrend continued in 2017 as well. President Trump’s market-friendly policies like lowering regulations and cutting taxes were positive for the markets. The tax cut helped US companies’ 2018 earnings.
However, the tax cut was a one-time boost to companies’ earnings. While the 2018 numbers look encouraging for most companies, the growth rates are expected to fall sharply in 2019. Since the tax bill, there haven’t been many measures from the Trump Administration to boost equity markets. The infrastructure investments that President Trump touted during his presidential campaign haven’t really taken off due to a lack of funds.
In contrast, the trade war that President Trump unleashed with the Section 232 steel and aluminum tariffs has taken a toll on market sentiments. The tariffs have also led to higher costs for end users. Coca-Cola (KO) cited the tariffs as one of the reasons why it increased prices. Despite opposition from companies like Walmart (WMT), Amazon (AMZN), and Alphabet (GOOG), President Trump went ahead with tariffs on $200 billion of Chinese goods in September with a less-than-expected 10% tariff.
President Trump’s trade rhetoric may or may not bring long-term dividends for the US economy. In the short term, the trade rhetoric might have led to uncertainty in investors’ minds. The tariffs have also contributed to inflation, which is leading to an even more hawkish Fed.
Next, we’ll discuss how the hawkish Fed is spooking equity investors.