A Trade War Reality Check
Are the U.S. and China talking?... In the meantime, the real-world impact of tariffs... Small businesses are stressed... Another 'Starbucks indicator'?... Remember these signals...
Maybe it's a matter of semantics...
While President Donald Trump says the U.S. and China are talking "every day" about trade negotiations, a Chinese government spokesperson said they aren't speaking at all.
Both of those statements can't be right. So maybe it's just a matter of semantics. After all, negotiations do seem to be playing out through the media.
For example, Trump recently said the 145% tariff he threatened against imported goods from China "won't be anywhere near that high."
Today, China's Ministry of Commerce spokesperson said, "If the U.S. really wants to resolve the problem... it should cancel all the unilateral measures on China," which sounds like there's room for discussion.
So by the time Trump's 90-day tariff pause is over in a few months, the global trade picture could look better than it did on "Liberation Day," when a chart of high double-digit tariff rates on major U.S. trading partners shocked a lot of people. That's the bullish case.
And Mr. Market appears to be reacting to the prospect of a "less bad" tariff war.
The major U.S. stock indexes moved higher for a third straight day today and aren't far from where they were in the days leading up to Liberation Day. The tech sector of the S&P 500 Index led today, up nearly 4%.
But here's the other big part of the tariff back-and-forth story...
While the market may be moving higher, businesses aren't waiting for politicians in Washington, Beijing, or anywhere else to start talking to each other. And we're already seeing negative short-term impacts on the economy from the threat of new taxes on U.S. imports.
We're having flashbacks to the early days of the pandemic in spring 2020 with global supply-chain disruptions, which ultimately were fuel for a serious high(er) inflation problem.
For example, reports say Chinese imports are on pace to drop by a third. Expected arrivals for ships at the port of Los Angeles next week are projected to be almost 30% lower than this week. And scheduled arrivals for the week of May 4 are down more than 30% from the same time last year.
We also know people have been "panic buying" goods that are in the crosshairs of tariffs, like cars and trucks. As we wrote in our April 10 edition...
Research firm Cox Automotive estimates that prices for foreign-built cars will go up $6,000, while even cars assembled here in the U.S. will jump $3,600. With an average new car price of $48,000 in the U.S., those price hikes represent anywhere from an 8% jump (for those assembled domestically) to 13% (for those imported to the U.S.).
Those price hikes are pulling sales forward – Cox saw a 30% jump in buyer traffic on its Kelley Blue Book and Autotrader sites in the days before auto tariffs went into effect.
It's not just cars...
Even though Apple (AAPL) has shifted some manufacturing to India and Vietnam, the iPhone is still mainly manufactured in China – which is now facing another tariff increase. A report from Bloomberg suggested that one calculation of the planned tariffs could force a 42% jump in iPhone prices to more than $1,100.
Bloomberg's report said that folks are also "panic buying" iPhones. And tariffs are on their mind – with one Apple store employee saying "almost every customer" was asking if prices were headed higher.
The Federal Reserve's latest "Beige Book," released today, is filled with anecdotes from businesses in various regions that point to this trend (and other tariff-related concerns). From the report...
[M]ost Districts saw moderate to robust sales of vehicles and of some nondurables, generally attributed to a rush to purchase ahead of tariff-related price increases. Both leisure and business travel were down, on balance, and several Districts noted a decline in international visitors.
From the New York Fed's portion of the report...
A shipping industry contact indicated that there was strong demand since the last report, with a significant pulling forward of imports in anticipation of tariffs and other policy changes. Delivery times were unchanged, and supply availability declined slightly but it is expected to worsen considerably in the coming months.
This behavior essentially "pulls forward" economic activity that would have happened down the road – decreasing future supply, which is a scenario for higher future prices. We saw this during the pandemic with all kinds of goods, but perhaps most memorably with toilet paper.
Small businesses are stressed...
Meanwhile, as we've written recently, lawsuits from frustrated small-business owners are adding up.
Twelve states also joined the fray this week, filing a joint suit against the Trump administration that claims it's illegal to enact tariffs under the International Emergency Economic Powers Act.
In short, small businesses are hoping tariffs are reduced quickly.
Our colleague and Stansberry's Investment Advisory lead editor Whitney Tilson shared this excerpt from a recent Wall Street Journal article in his free daily letter today...
Basic Fun, a Boca Raton, Fla.,-based seller of children's toys, has also halted shipments from China, hoping that tariffs recede to more manageable levels. The company has about two months of inventory of Lincoln Logs, Care Bears and other items in U.S. warehouses, Chief Executive Jay Foreman said.
"Basically, what we're doing is eating our inventory and hoping that it will last us until this gets settled," he said. "If it doesn't, we'll be out of business."
Rick Woldenberg, the CEO of an Illinois-based, family-owned, 500-employee toy business, explained to CBS News that his company's import duties are set to increase from $2.3 million to $100 million – a roughly 4,000% increase. Meanwhile, he expects sales to drop 25% as consumers pull back on spending. "The path is catastrophic," he said.
I (Corey McLaughlin) know we have a lot of small-business owners in our audience. I'm curious to hear how you're managing things right now and what your thoughts are about tariffs. Let us know at feedback@stansberryresearch.com.
Now, the overall situation may be temporary or have a one-time impact – especially if the scope of tariffs ultimately ends up being less than expected right now.
And this is not a discussion about the recently announced long-term investments from companies like Apple and Nvidia (NVDA) to avoid higher import costs. We'll have to wait and see whether these investments pay off years from now in the form of more production and jobs in the U.S.
We're interested in talking about the direction of the markets and tariff policy right now, which isn't making life easier for businesses, big or small.
Companies are continuing to pull their guidance...
As earnings season continues, major companies are pulling their forward guidance because of the uncertain economic picture – which increases the odds that any growth plans are on pause. We haven't seen this sort of behavior since the COVID-19 pandemic.
Southwest Airlines (LUV) and American Airlines (AAL) are the latest companies to pull their guidance. As Southwest said in a U.S. Securities and Exchange Commission filing yesterday...
Amid the current macroeconomic uncertainty, it is difficult to forecast given recent and short-lived booking trends.
Another 'Starbucks indicator'?...
One company that did report full guidance after yesterday's close was fast-food chain Chipotle Mexican Grill (CMG). First-quarter earnings were solid, as Whitney wrote today...
Year over year, revenue and earnings per share rose 6.4% and 7.7%, respectively.
But same-store sales were down 0.4% due to a 2.3% decline in transactions, partially offset by a 1.9% increase in the average check size. It was the first year-over-year quarterly decline since the pandemic, missing estimates of a 1.7% increase.
And the company lowered its revenue guidance for the full year to the low-single-digit range versus previous guidance of low- to mid-single digits.
The fact that same-store sales for a major fast-casual food chain are declining – for the first time since the pandemic – grabbed my attention. It reminds us of our colleague and Stansberry's Credit Opportunities editor Mike DiBiase's "Starbucks indicator," about same-store sales performance at the ubiquitous coffee retail chain.
As Mike explained in his December issue of Credit Opportunities...
When sales at the coffee giant's stores that have been open for more than one year fall from the previous year, it signals consumers are tightening their belts and eliminating expensive, discretionary treats.
Consumer spending is the largest component of GDP, accounting for around 70%. As we've said before, folks getting a cheaper morning coffee won't doom the economy on its own. But it signals something about what else people might not be buying. From our February 6 Digest...
Mike's Starbucks indicator has been spot-on for the past two recessions. In both 2008 and 2020, Starbucks saw at least one quarter of declining same-store sales (and six straight quarters of declines during the great financial crisis).
Right now, this indicator is flashing again. Look at this chart that Mike shared...
And the most recent data shows no turnaround for the coffee chain. In its quarterly earnings report last week, Starbucks reported a 4% drop in same-store sales. That marked the fourth-straight quarter of declines.
Starbucks (SBUX) reports earnings again on Tuesday. We'll note its in-store trends and other takeaways. Incidentally, Starbucks also hired Chipotle's former CEO, Brian Niccol, last August, which we think adds some legitimacy to the comparison.
Putting it together...
While we've been seeing what increasingly looks like a relief rebound from the Liberation Day panic a few weeks ago, the impacts of tariff uncertainty on the U.S. economy are still being realized.
So even if stocks keep moving higher, keep these early warning signs about the economy in mind as you navigate the rest of 2025.
We haven't even discussed the labor market, which we suspect will become a bigger story as the year goes on if tariffs crimp businesses' budgets, leading to layoffs and/or higher prices.
So we continue to preach the fundamentals.
Own shares of high-quality businesses that can compound your wealth in "good" times and "bad." For example, some of our favorite property and casualty insurers are inching back toward their all-time highs. And buy new shares at reasonable prices.
We also recommend having exposure to hard assets like gold, which has done exactly what we'd expect it to do as a "chaos hedge" lately (and for the past year-plus, in addition to its centuries-long history as a reliable store of value).
While we haven't mentioned it in a while, you might also want to consider owning a small position in bitcoin as a diversifier and "asymmetric bet" against the clear warts of the U.S. dollar system.
Finally, have some cash available to put to work when opportunities present themselves, like when "everyone else" is panicking.
New 52-week highs (as of 4/23/25): Alpha Architect 1-3 Month Box Fund (BOXX).
"Sometimes I think people at Stansberry are a little too nice referring to President Trump and what he says or does. He is a compulsive liar, and I would say a market manipulator. He is turning out to be no different his second term compared with his first term about what he is saying on social media then denying later. The market is whipsawing like crazy based on what says..." – Subscriber Chris P.
"So the U.S. and China are going to live happily ever after... Trump is a whirligig. What will tomorrow's pivot be?" – Subscriber Sherwin R.
"Trump's negotiating strategy is just that... a strategy to get the players to the table and it's working. If the [Chinese] don't want to play, so be it. The market will respond accordingly and you... as the experts... know good and well it needed corrections and adjustments to the overvalued sectors. Am I wrong?..." – Subscriber Vince C.
All the best,
Corey McLaughlin with Nick Koziol
Baltimore, Maryland
April 24, 2025