Change is Coming

Tariffs are Coming for Your Investments

In 2020, the U.S. joined Mexico and Canada in a free trade agreement that updated and improved the original North American Free Trade Agreement (NAFTA). However, the incoming administration plans to slap tariffs on those countries, regardless of that agreement. 

The impact on our economy could be profound.

The incoming administration proposed 200% tariffs on imports from Mexico and 60% to 100% on goods imported from China. We believe the planned tariffs will have a massive impact on the stock market. And investors would do well to prepare. We are not alone in our concerns.

Giant retailer Walmart said that it will raise prices if the tariffs hit. CFO David Rainey told CNBC:

“We never want to raise prices. Our model is everyday low prices. But there probably will be cases where prices will go up for consumers.

“We’ve been living under a tariff environment for seven years, so we’re pretty familiar with that. Tariffs, though, are inflationary for customers, so we want to work with suppliers and with our own private brand assortment to try to bring down prices.”

Retail stores will be hardest hit. In addition to Walmart, chains like Dollar Tree and Five Below import most of their stock. Shoemakers like Crocs and Sketchers will be hit hard. Auto parts companies like AutoZone will respond by raising prices as well.

Tariffs will hit clothing companies like Columbia Sportswear, Steve Madden, and American Eagle Outfitters. Home improvement stores will see higher prices. Lowe’s CFO Brandon Sink agrees with Rainey. He said that tariffs will increase costs of goods.

The looming tariffs will cause a scramble for suppliers. Companies need to diversify their imports across many countries to minimize impacts. Unfortunately, countries like Mexico, Canada, and China built out industries to supply U.S. goods.

From an investor point of view, we need to plan for earnings declines. Either these companies eat the tariffs, or they make their goods more expensive. The first case will reduce earnings to cover the taxes. The second case will impact sales…and reduce earnings.
Either way, some high-flying companies will see their share prices decline. That’s already starting to happen. Shoemaker Crocs (Nasdaq: CROX) took a huge hit after the election:

This is a retailer identified by Bank of America analysts as particularly exposed to the new tariffs.
We believe the incoming administration will enact tariffs. It was a hallmark of the previous term. And if Walmart takes a big hit, it could lead to a much broader impact. The entire stock market is ripe for a pullback, as you can see from the S&P 500 index here:

And again, we aren’t alone. According to the Financial Times, a record number of U.S. executives are selling shares in their companies:

That’s a signal we can’t afford to ignore.

For the Good,

The Mangrove Investor Team

Numbers You Need to Know

1789

The first U.S. tariff was the Tariff of 1789 signed by President George Washington imposing a tariff of about 5% on nearly all imports, with a few exceptions.. (Wikipedia)

June 17, 1930

Considered the largest tariff in U.S. history, the Senate passed the Smoot-Hawley Tariff. As the economists predicted, the high tariff proved to be a disaster. U.S. trading partners began retaliating and it added considerable strain to the international economic climate of the Great Depression. (U.S. Customs and Boarder)

$2.6 trillion

A broad 10% tariff on goods imports, with a 60% tariff on Chinese imports, would raise $2.6 trillion over the next decade—0.7% of GDP—if other countries did not retaliate against the US. If targeted countries retaliate, however, as is likely the case, tariff revenue falls by 12-26% depending on the scenario. (The Budget Lab Yale)

What’s New in Sustainable Investing

ESG investors retain hope even after Trump’s victory

Donald Trump’s returns to the White House vowing to support the fossil fuel industry and this could strengthen the hand of those leading a backlash against sustainable investing. But observers insist it is not game over, as funds continue to flow into renewable energy and green technology assets. (Financial Times)

How to decide whether sustainable investing is right for you

While the catch-all term ‘ESG’ has become a political flash point, investors and retirement savers still have options to green their portfolio. (The Washington Post)

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