We Now Know What The "Trump Tariff Put" Is

Submitted by Nick Colas of Datatrek Research

We got the first sign of a “Trump Tariff Put” on Monday as the White House walked back threats to the Tech sector late in the day after a steep intraday decline in US stocks. That got us wondering: what sort of equity market pullback would it take to have the White House shelve/materially soften its plans to renegotiate numerous trade pacts? Our back of the envelope math: 9% on the S&P from here, or a 3-5% one-day decline on Chinese/European retaliation.

In a recent note we cast a wary but hopeful eye on the notion of a “Trump Tariff Put”; yesterday we saw it in action. The day started with a Wall Street Journal article outlining possible limitations on Chinese investment in US companies with “Industrially significant technology”. A pre-open walk-back tweet from Treasury Secretary Mnuchin did little to calm markets. At the lows of the day the S&P was at 2700, down 2%.

Then trade advisor Peter Navarro came out in the afternoon and said to “discount” notions that there would be investment restrictions. That seemed to do the trick, and the S&P closed at 2717. One gets the feeling that perhaps policymakers are unaware that Technology is 26% of the S&P 500, and by taking its trade issues into that sphere they crossed a red line. At least as far as equity markets go…

Making some lemonade from Monday’s tart action, at least we now know what sort of market action makes trade hawks fly back to the nest for a break. The magic number seems to be 2% on the S&P and right around 500 points on the Dow Jones Industrial Average. For our readers who trade for a living, it is worth keeping those numbers in mind for future trade news-driven days.

Thinking a little more broadly about the “Trump Tariff Put”, let’s consider how much of a stock market slide it would take to convince the White House to materially soften its efforts on this front. We know from Monday’s headlines this is their Achilles Heel. But how big is that target?

A few background thoughts here:

  • #1. Whether by a happy accident or entirely intentionally, policymakers have staged their economic/trade program quite cleverly since the start of 2017. Year 1, focus on tax cuts to rev the US economy and push equities to all-time highs. Year 2, do the heavy lifting on the trade issues that were a hallmark of President Trump’s campaign for office. Hope that Year 1’s actions serve as a counterweight to Year 2’s harsher measures.
  • #2. That makes the current trade initiative entirely dependent on real-time economic growth and, by necessity, equity market returns. And since the latter keys off not just on current earnings but their perceived sustainability/future growth, the Trump administration’s focus on stock prices does have some self-correcting moderation built into the cadence of its actions.
  • #3. The wild cards in the deck just now: a Federal Reserve bent on raising interest rates, a slow motion train wreck in emerging markets, and global debt levels over 2x higher than a decade ago. How much of these factor into White House trade policy is hard to know. The same holds true, of course, for US equity prices. And how much the current administration will parse the effects of these factors to determine its course of action on trade is the $64 question.

So how much of an equity decline would it take for the administration to soften its tone on trade? Two answers:

  • Down 9% on the S&P from here, as long as the decline was clearly due to trade war concerns. The math behind this guesstimate: the index is up about 18% since President Trump took office. Giving back half those gains would be palatable. More than that would not be, and may even spook markets and consumers into thinking a recession was inevitable. Not the right scenario going into midterm elections.
  • A 3-5% one-day move lower based on European/Chinese retaliation. We know from Monday’s action that 2% is some sort of a pain threshold, but “fixing” it was still in the administration’s power (Navarro’s late date walk-back). If that were not possible because the catalyst was outside US control, that might be enough to push the White House into a softer stance.

Bottom line: as investors gather more experience with this administration, they see that it responds and shifts positions based on news flow. And if we’ve learned one thing about “Policy puts” over the decades, it is that markets get pulled in the direction of the strike price once volatility picks up.