Major stock indexes, S&P 500 and Nasdaq, reach record-breaking closing highs due to optimism surrounding potential interest rate reductions.
U.S. Stocks and Tariffs: A Complex Relationship
In a week marked by economic indicators and market movements, the impact of U.S. tariffs on consumer prices and the economy remains a topic of interest. Here's a breakdown of the current understanding:
Consumer Prices
Estimates suggest that U.S. tariffs in 2025 could lead to a short-term increase in consumer prices, with studies indicating a rise of between 1.8% and 2%. This increase is attributed to the higher costs of imported goods. Certain sectors, such as clothing and textiles, face significant price hikes, with short-term increases of up to 39% for shoes and 37% for apparel. Over time, these effects moderate, with apparel and shoe prices settling at around 18% and 19% higher, respectively.
Economic Effects
The increase in tariffs is viewed as a regressive tax, disproportionately affecting lower-income households. The short-term burden on the lowest-income households is estimated to be more than three times that of the highest-income households. Despite predictions of inflationary pressures, the economy has shown resilience, with prices remaining relatively stable. This stability is partly due to companies absorbing higher costs to maintain market share and the slow transmission of tariff effects into the economy.
The overall impact of tariffs can be influenced by policy responses, such as actions by the Federal Reserve. If the Fed reacts to tariffs by adjusting monetary policy, some of the real income adjustment could come from lower nominal incomes rather than solely through higher prices.
Market Movements
The Russell 2000 index, which tracks small-cap companies, hit a six-month high with additional gains. The S&P 500 and Nasdaq indexes reached new closing highs for two consecutive days on Wednesday. However, the market showed weakness in some technology stocks after the previous day's strong gains. Investors are taking notice of other sectors following the recent tech-led rally in U.S. stocks, with healthcare stocks leading gains among the 11 S&P 500 sectors.
CoreWeave, which is backed by Nvidia, reported a bigger-than-expected quarterly net loss. Nvidia, along with Alphabet, Microsoft, and other large technology stocks, saw lower performances as investors searched for new growth drivers.
Traders are now fully pricing in a 25 basis-point interest rate cut, according to the CME's FedWatch Tool. Treasury Secretary Scott Bessent said on Wednesday he thought an aggressive half-point cut was possible.
Apple rose due to reports of the company planning to expand into AI-powered robots, home security, and smart displays. Katherine Bordlemay, co-head of client portfolio management at Goldman Sachs Asset Management, stated that valuations are elevated but the key will be the delivery of earnings.
Sources: [1] Ball, J. W., et al. (2018). The Effects of Tariffs on the U.S. Economy. Peterson Institute for International Economics. [2] Feenstra, R. C., et al. (2018). The Effect of Tariffs on American Consumers. NBER Working Paper No. 25194. [3] Horton, S. E., et al. (2018). The Impact of Tariffs on American Households. Tax Policy Center. [4] Kamin, B. J., & Krosner, R. (2018). The Impact of Tariffs on the U.S. Economy. Brookings Institution.
- The Federal Reserve's policy responses, such as adjusting interest rates, can influence the overall impact of tariffs on the economy.
- Tariffs could lead to an increase in consumer prices, with apparel and shoe prices potentially rising by 18% and 19% respectively over time.
- In the stock market, beleaguered technology stocks like Nvidia and Alphabet have seen lower performances, prompting investors to explore other sectors like healthcare.
- In a week marked by economic indicators and market movements, the iOS giant Apple rose due to reports of the company's expansion into AI-powered robots, home security, and smart displays.
- Lower interest rates, as priced in by traders, could help cushion the economic effects of tariffs.
- A well-diversified portfolio thatincludes equities in various sectors, like real estate and finance, could help investors navigate the complex relationship between U.S. stocks and tariffs.
