Where This Stops, Nobody Knows
Tit for tat... The ballpark consequences of tariffs... The bull market is still on... Why the EU?... A big week for the war in Ukraine... The next inflation numbers... Weight-loss drugs and snack makers... A nothing burger...
The trade war is heating up...
A day after President Donald Trump slapped a 25% tariff on imports of steel and aluminum to the U.S. starting next month, European Union ("EU") chief Ursula von der Leyen threatened "proportionate countermeasures" on what she described as an "unjustified" tax.
The EU exported 3.6 million tonnes of steel to the U.S. in the first 11 months of 2024. The U.S. is also the second-biggest export market for EU steel producers, making up 16% of the EU's total steel exports.
So, conceivably, this tariff could boost U.S. manufacturing by disincentivizing steel imports from Europe. Trump says that's the intention, and it would have a significant negative impact on the European steel industry. Canada would also suffer as the biggest exporter of aluminum and steel to the U.S.
No wonder leaders of the EU's 27-member bloc gathered for an emergency video call to discuss their response today... and they might enact their own tariffs on certain U.S. exports to Europe.
German Chancellor Olaf Scholz, leader of the EU's largest economy, told the German parliament that "if the U.S. leaves us no other choice, then the European Union will react united..." He said, "Ultimately, trade wars always cost both sides prosperity."
And it doesn't end there...
Trump has already said he's planning to enact his own retaliatory tariffs, presumably on China. You see, China put a 15% tariff on some U.S. imports and a set of export controls to the U.S. last week. That was in response to Trump's additional 10% blanket tariff on Chinese imports earlier this month.
Essentially, all the paperwork for these imports just got more expensive for the companies doing the importing. This will likely be passed on to consumers... or at least accounted for in a company's bottom line.
Ballpark consequences...
There's no way to know what the ultimate impacts of a tariff tit for tat will look like. But an increasing number of market observers are raising concerns about a global trade war, expected high(er) inflation, and lower economic growth.
Here's part of an article from Yahoo Finance this morning...
A new report from Deutsche Bank economists projects the steel and aluminum tariffs alone could boost the core personal expenditures price index (PCE) – a key read on inflation – by 0.4%.
Should the tariffs on Mexico and Canada go through, inflation could rise more than 3.5%, Deutsche Bank said. On this front, Goldman Sachs economists estimated "long-term" 25% tariffs on Canada and Mexico imports could lift the PCE by 0.7% and hurt GDP by 0.4%.
These projections shouldn't be taken as gospel, but talking about shifting paths of inflation and GDP reflects changes in expectations for the entire U.S. economy. At the very least, any further trade war costs currently unaccounted for are likely to stoke market volatility.
As our Ten Stock Trader editor Greg Diamond wrote to his subscribers this morning...
The European Union has come out this morning stating they will retaliate [with] tariffs of their own.
Stock futures [are] down, interest rates are up.
With inflation numbers set to come out tomorrow, this is where volatility certain[ly] picks up.
The major U.S. stock indexes finished mixed today, with the benchmark S&P 500 and Dow Jones Industrial Average up slightly, the tech-heavy Nasdaq Composite Index down 0.3%, and the small-cap Russell 2000 Index down 0.6%.
However, even amid the rapid-fire headlines from Washington, all of these indexes are still trading above their longer-term 200-day moving averages. And all but the Russell 2000 are above their short-term 50-day moving average.
The bull market is still on.
Now, you might be wondering why Trump is targeting the EU...
China, we get... There has been intellectual-property stealing and decades of outsourcing of American industry to what is now the world's second-largest economy. With Mexico and Canada, if the reasons for tariffs are stronger border security, we can see the correlation.
But aren't we supposed to be good friends with the EU?
Well, yes. But depending on who you ask, we may have become a little "too friendly" with the EU.
Trump says the aim of the new tariffs is to strengthen the U.S. steel and manufacturing industry. That's part of the "America First" agenda he has campaigned on for about a decade.
I (Corey McLaughlin) could be wrong about this, but I suspect the timing of these tariffs is also part of the "Art of the Deal"... and that Trump wants to put pressure on European nations to repay the U.S. for the roughly $66 billion it has spent funding Ukraine's defense in the war with Russia, as Trump said in a Fox News interview that aired yesterday.
Not coincidentally, European leaders and senior U.S. officials – including Vice President JD Vance and Secretary of State Marco Rubio – will be gathering this week for a meeting of the Ukraine Defense Contact Group ("UDCG") in Belgium. The subject of Western funding of the war is expected to be heavily discussed. As CNBC reported today...
National security advisor Mike Waltz told NBC News' "Meet the Press" on Sunday that U.S. officials would use the UDCG meeting to pursue a deal with Kyiv regarding aid and to push European partners to bear more responsibility for Ukraine's future.
"We need to recoup those costs and that is going to be a partnership with the Ukrainians in terms of their natural resources and their oil and gas and also buying ours," Waltz said Sunday.
"Those conversations are going to happen this week. And I think an underlying principle here is that the Europeans have to own this conflict going forward. President Trump is going to end it. And then, in terms of security guarantees, that is squarely going to be with the Europeans."
Trump also wrote in a social media post today that Treasury Secretary Scott Bessent is headed to Ukraine to talk with President Volodymyr Zelenskyy. And he told Fox News that he wants "the equivalent of like $500 billion worth of rare earth (minerals)" from Ukraine, "and they've essentially agreed to do that." Meanwhile, Trump said he and Russian President Vladimir Putin have been talking, too.
You can kind of see the path toward a potential end to the war in Ukraine. The devil will be in the details, though, because it sounds like all interested parties are trying to leverage something out of a truce.
The next inflation numbers...
Tomorrow morning brings January's consumer price index ("CPI") numbers. And on Wednesday, Uncle Sam will publish the latest producer price index ("PPI") read.
Potential tariff consequences won't be reflected in these numbers since they're just going into effect. But investors will be looking to see whether these inflation measures show a continued trend of disinflation.
The Federal Reserve will use this data – showing whether the pace of price increases remained stable, slowed down, or accelerated so far this year – to help guide its rate-cut decisions moving ahead.
The pace of inflation has slowed down in the past two months, but concerns of a reacceleration are growing, and Wall Street has tempered its expectations for rate cuts this year, though fed-funds futures traders still expect at least two in the second half of 2025.
Today, Fed Chair Jerome Powell sat for the first of two straight days of semiannual testimony in front of Congress. "We do not need to be in a hurry to adjust our policy stance," Powell said, meaning the Fed isn't in a rush to cut rates.
Another central banker, Cleveland Fed President Beth Hammack, said something similar today... that lower rates are likely on pause for a while and "upside risks to the inflation outlook abound" – specifically, the inflationary risk of tariffs and strong consumer spending.
In the meantime, we've picked up on an interesting trend from earnings season...
Over the past year, some investors have been worried about the effect weight-loss drugs would have on certain food producers.
The reasoning is pretty simple... GLP-1 weight-loss drugs from companies like Eli Lilly (LLY) and Novo Nordisk (NVO) help people lose weight by reducing appetite... which should lead to lower demand for snacks and sugary drinks.
Investors labeled household names like Coca-Cola (KO), PepsiCo (PEP), Hershey (HSY), and Mondelez (MDLZ) as the most at risk. Over the past year, investors have sold off the stocks as a result...
Both PepsiCo and Mondelez have seen their stocks fall more than 25% from their recent highs. Coca-Cola is down more than 10% from its 2024 high. Stansberry Research favorite Hershey is the worst of the bunch – down more than 40% from its 2023 peak (more on that in a bit).
But it's much ado about nothing...
With earnings season in full swing, these companies have a chance to ease fears that weight-loss drugs will destroy their business...
And as financial adviser Lawrence Hamtil shared on social platform X last week, the companies mentioned above recently fielded analyst questions on the threat. They've responded with answers that are the equivalent of a big nothingburger...
Hershey CEO Michele Buck said the chocolate maker is seeing "no material impacts" from weight-loss drugs.
Mondelez CEO Dirk Van de Put explained, "No, we do not necessarily see snacking diminishing."
PepsiCo, which has a snack business alongside its namesake soft drink, said it has seen "very little impact."
Those are all confident answers that weight-loss drugs haven't caused a huge slowdown in demand for snacking.
The companies did mention folks are becoming more health conscious when it comes to snacks, but that trend was in place long before weight-loss drugs. And snack companies have expanded their portfolios to include healthier options for consumers.
Our team's thoughts on Hershey...
As we mentioned above, longtime Stansberry Research recommendation Hershey has been hit the hardest of the bunch. Not only is it facing pressure from weight-loss drugs, but cocoa prices have spiked – making it more expensive to produce its famous chocolate bars. And its price hikes haven't been able to keep up with increased costs so far.
That doesn't worry the Stansberry's Investment Advisory team, though. Hershey has been an active recommendation in our flagship newsletter since November 2007. And it's not going anywhere. As the Stansberry's Investment Advisory team wrote in their most recent issue...
We've received subscriber questions asking what they should do with their beaten-down shares. The answer is simple... nothing at all.
We hold Hershey's shares without a stop loss for a reason. This is a company we want to hold forever. It owns one of the best brands on the planet. And it's almost certain that your great-grandkids' kids will still be devouring Hershey's chocolate, too.
In short, the sell-off in Hershey has gone too far. The worries about short-term pricing and threats from weight-loss drugs seem to have unfairly punished the stock.
But Stansberry's Investment Advisory subscribers who followed our founder Porter Stansberry's initial recommendation of Hershey are still sitting on big gains, and our team believes in the stock as a place to keep compounding wealth.
More from the Stansberry's Investment Advisory team in this month's issue...
Even with the huge drawdown, we're still up 384% (including dividends) since we recommended the company. That beats the market's return over the same period.
We don't make formal recommendations here in the Digest, but in general, a drawdown in one of the world's best businesses is the kind of opportunity that represents a great entry point to establish a position in what we consider a "forever stock."
Stansberry's Investment Advisory subscribers and Alliance members can read the team's full breakdown of Hershey's recent sell-off right here.
New 52-week highs (as of 2/10/25): Agnico Eagle Mines (AEM), Alamos Gold (AGI), Alpha Architect 1-3 Month Box Fund (BOXX), Maplebear (CART), Coca-Cola Consolidated (COKE), Costco Wholesale (COST), Cisco Systems (CSCO), Simplify Managed Futures Strategy Fund (CTA), Commvault Systems (CVLT), CyberArk Software (CYBR), Viant Technology (DSP), Equinox Gold (EQX), Expedia (EXPE), Franco-Nevada (FNV), Fortinet (FTNT), SPDR Gold Shares (GLD), HealthEquity (HQY), Kinross Gold (KGC), Grand Canyon Education (LOPE), Meta Platforms (META), Sprott Physical Gold Trust (PHYS), Republic Services (RSG), Skeena Resources (SKE), Spotify Technology (SPOT), Torex Gold Resources (TORXF), ProShares Ultra Gold (UGL), United States Commodity Index Fund (USCI), Visa (V), and VeriSign (VRSN).
In today's mailbag, some more thoughts on tariffs... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"Tariffs are just a tax, paid by the citizens of the country that imposes them [passed through from businesses that actually pay the tariff], but it is an unfair tax because rich and poor are equally saddled with the increased cost of goods..." – Subscriber Simon K.
All the best,
Corey McLaughlin and Nick Koziol
Baltimore, Maryland
February 11, 2025