While the market eagerly accepted the Trump Bump following election day, it has willfully had its head in the sand on potentially markets-disruptive aspects of the new US administration. Up until this weekend, the threat of new tariffs – a hallmark of Trump’s economic policy agenda – has generally been written off as a negotiating tactic or campaign bluster. That has fundamentally misunderstood the concept of a negotiating tactic, namely that the person (or nation-state) one is negotiating against needs to believe you’ll do what you say.
As we have said - Trump has come into this second term with plans for executing his strategies that have essentially nothing in the way of roadblocks.
Even with the slide after headlines hit on Friday, there was still a distinct feeling in markets of disbelief, complacency or perhaps a combination of both. Beneath the surface of the weakening index, trading in single names did not hit obvious victims of 25% tariffs on Canada and Mexico much harder than their better insulated peers if at all.
The market’s default stance seemed to be that even if tariffs were implemented, they’d be of the gradual or selective variety as suggested by Treasury Secretary Bessent or CEA Chairman appointee (and one-time CitriniResearch co-author) Stephen Miran. Perhaps U.S. trading partners were assuming the same.
This is exactly what has spurred Trump’s weekend announcement.
While ostensibly linked to the fentanyl crisis and triggered via the International Emergency Economic Powers Act (IEEPA), we think this is merely a convenient justification. The Saturday announcement of tariffs on the U.S.’s top three trading partners (25% tariffs on Mexican and Canadian goods, (10% on Canadian energy), and an incremental 10% duty on Chinese goods) is a wake up call.
The Trade War is not an empty threat, and investors should be keenly aware that although this is certainly a negotiating tactic there is very little stopping Trump from upping the ante even further if he doesn’t get what he wants. His intent is to get the world to believe him for the rest of his term - and when you’re a U.S. trading partner, announcements that result in this kind of USD price action are hard to forget.
As with all wars, this trade war will bring casualties on both sides. Unsurprisingly, retaliatory actions have already been announced. Trump, confident in his asymmetric advantage, appears ready to bear the pain. Put bluntly in the announcement:
“While trade accounts for 67% of Canada’s GDP, 73% of Mexico’s GDP, and 37% of China’s GDP, it accounts for only 24% of U.S. GDP. However, in 2023 the U.S. trade deficit in goods was the world’s largest at over $1 trillion.”
These three countries represent roughly 40% of international trade with the United States. In 2024, U.S. imports from Canada, Mexico, and China totalled $1,358 billion (42% of total), while U.S. exports totalled $832 billion (40% of total). The newly imposed tariffs would amount to over $250 billion in annualized duty on these imports, while retaliatory tariffs would add over $150 billion to exports.
In short, we believe this move is an intentionally manufactured pain trade. The purpose is to cause trade, market, and FX disruption, with the expectation that effects will be felt disproportionately on the foreign side. The ambiguous pretense offers little in the way of an actual path towards appeasement for Canada or Mexico and allows Trump to offer “reprieve” at his discretion.
Motivated by a longer-term strategy of balancing trade deficits and spurring domestic industry, the short term effects will likely come with supply chain disruption, export weakness, and price pressure.
While the market may take time to digest the practical impact on individual names (as well as handicapping the duration of the tariffs), we expect to see an initial knee-jerk reaction focused primarily on the most obvious first-order winners and losers.
So, after having our weekend ruined by the market’s reaction to DeepSeek (and our insistence on being prepared), we’re running it back by preparing to trade the trade war.
Here are some ideas we are considering in equities and macro…