Trump's tariff threats swing the markets, but investors aren't worried; The impact of tariffs on Apple, Diageo, and Nike

1) Tariff threats by the Trump administration are whipsawing the markets, as investors try to figure out what's real and what's negotiating bluster. Here's the latest from the front page of today's Wall Street Journal: Trump Tariffs Caused a Market Meltdown, but Investors Shook It Off. Excerpt:

The Trump administration's proposed tariffs jolted global markets Monday, driving huge swings in stocks around the world.

President Trump's weekend threat to place tariffs on goods imported from Mexico, Canada and China triggered a sharp overnight drop in global stocks and futures that continued in early trading Monday. But by midday, many of the trades had reversed after the U.S. and Mexico struck a last-minute deal to delay new levies.

Investors were closely monitoring the developments, hopeful for a resolution.

Investors are betting things won't change much from an economic and market perspective when everything is said and done, as the WSJ's James Mackintosh writes: Markets Bet Trump's Tariffs Are Art of the (Temporary) Deal. Excerpt:

As you were. President Trump's on-again, off-again tariffs briefly hit the market on Monday, before fear evaporated. What it shows: Investors are convinced he will use tariffs to extract concessions on other issues, rather than, as he keeps saying, to raise money and force companies to relocate to America.

On Monday, investor confidence that tariffs won't break the bull market proved mostly right. The S&P 500 closed down just 0.8%, as Trump suspended a 25% tariff on goods from Mexico for a month hours before it was due to go into effect. Canadian Prime Minister Justin Trudeau said Trump had agreed to suspend tariffs on goods from his country too, while China hopes to negotiate over the 10% extra being imposed on its exports to the U.S.

Aside from the sheer entertainment/horror (depending on whether or not you are Canadian), Monday told us quite a lot about what investors believe. This will be useful when Trump turns his attention to other countries – or back to Mexico and Canada.

There were three lessons to draw from the market's swings: Confirmation that investors really do think tariffs will be at most temporary. Proof positive that investors disagree with Trump about the effect of tariffs. And evidence that Big Tech stocks aren't immune to tariffs, even though so much of their valuation depends on hopes about artificial intelligence.

I think this sentiment from investors is probably correct, though I emphasize the word "probably" – it's not a certainty. This other WSJ article highlights how things could go awry: Are Markets Underestimating the Tariff Problem? Excerpt:

It has now become obvious that Trump's current protectionist policies are significantly more extreme than the ones he introduced in his first term. Back then, he focused on unfair trade practices and national security, with tariffs primarily levied on China and beyond that largely limited to specific goods and industries such as steel, aluminum and household appliances. They were also gradually introduced, giving businesses time to adapt. Yes, global manufacturing output came under pressure in 2019, but it had gotten a small boost in 2018 as firms stockpiled inventories.

This time, if targeted countries refuse to yield, U.S. effective tariff rates could suddenly become the highest since the late 1930s. On top of hitting domestic growth and spurring inflation, this could derail a network of complex supply chains which, as the pandemic showed, can have unpredictable effects...

By being too blasé about tariffs, investors have already raised the chances that the U.S. administration will step closer to the edge, confident that markets have signaled that the outcome won't be too punishing. With the S&P 500 trading at a steep 22 times earnings, the shift from "America first" to "tariffs first" is something to be very wary about.

In summary, my advice is that if you own good stocks and/or diversified index funds like the S&P 500, you should ignore the dramatic headlines and short-term market swings and focus on the long run. As I've argued many times before, while investors should have modest expectations in light of stocks' high valuation levels, the U.S. economy is strong and I don't think we're anywhere close to bubble territory.

2) But certain stocks are at higher risk than others. Among the tech giants, Apple (AAPL) could be most at risk, as this WSJ Heard on the Street column notes: Apple Can't Stay Mum on Tariffs for Long. Excerpt:

Apple's hardware-centric business model makes it far more exposed to tariffs on Chinese imports compared with megacap tech peers such as Microsoft, Amazon and Alphabet. Apple's stock price fell more than 3% on Monday – Microsoft, Amazon and Alphabet averaged a decline of less than 1%.

The impact of tariffs on Apple's business will depend greatly on whether the company decides to raise prices to compensate. If Apple maintains its U.S. prices, Wamsi Mohan of BofA Securities estimates an impact of less than 1% to this year's per-share earnings. On the other hand, raising prices would protect margins, but likely cost the company some sales. Mohan estimates a 3% price raise in the U.S. could result in 5% fewer device units sold.

Lower sales could threaten an iPhone cycle that is already looking a bit weak.

I continue to think Apple is an insanely great company, but its valuation is much too high, as I wrote in my January 13 e-mail.

3) Another company that might be impacted by tariffs is spirits maker Diageo (DEO), which I analyzed in my December 18 e-mail. The company just withdrew its midterm guidance, citing tariff uncertainty, though I suspect this is just an excuse for ongoing weakness in its business: Smirnoff Maker Diageo Scraps Midterm Guidance Amid Tariff Uncertainty. Excerpt:

The company behind Johnnie Walker whisky, Guinness beer and Smirnoff vodka on Tuesday withdrew its target of organic net sales growth of between 5% and 7% over the medium term, citing economic and political uncertainty in many of its most important markets weighing on its pace of recovery.

The move highlights the difficulties businesses face to navigate global trade tensions as they scramble to adapt to a rapidly changing environment. President Trump said Saturday that he would impose tariffs on imports from China, Mexico and Canada, but his administration struck deals Monday to delay imposing new levies on Mexico and Canada.

Diageo said the tariffs that President Trump announced would affect the Mexican tequila and Canadian whisky it sells in the U.S., the group's largest market. While the company has undertaken considerable contingency planning over the past few months, the latest developments increase the complexity in providing updated guidance, it said.

My conclusion from December remains the same: Diageo's valuation isn't "low enough to interest me," so I'll keep an eye on it and "hope the stock gets whacked by a bad quarter or two... At that point, the valuation might get low enough where it looks like a good buy."

4) Lastly, there's speculation that the bluster around tariffs could cause Chinese consumers to boycott Western companies like Nike (NKE), as this Heard on the Street article notes: Boycotts, Not Tariffs, Are the Real Risk for Clothing Brands. Excerpt:

The bigger risk is if the U.S. tariffs stoke boycotts within China. In 2021, Chinese consumers started avoiding Western brands – including Nike, H&M and Adidas – after nationalist users on social media noticed the brands' statements of concern about reports of forced labor in China's Xinjiang region. This had a lasting impact: At Nike, for example, Greater China revenues fell for four straight quarters, adjusted for currency moves, after the backlash.

China is a fast-growing and lucrative market for many of these brands. In its last full fiscal year, China accounted for 15% of Nike's revenues and 27% of operating profit.

Boycotts in China aren't likely in my opinion, and I think Nike is still a great opportunity. I wrote about the stock in my August 9, August 12, September 20, and October 3 e-mails, and my team and I recommended it in our September issue of Stansberry's Investment Advisory.

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Best regards,

Whitney

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