President Trump announced the possibility of tariffs on imports for steel and aluminum. This has caused a lot of investors to question what exactly these tariffs are and how are they going to affect certain companies and stocks in the market.
Should you be buying or selling stocks that deal with aluminum and steel? Or is this just more threats by the President, that have a wider endgame in mind?
Let me address that issue first. The President has a history of talking off-the-cuff, making threats, cajoling, trolling and generally trying to throw a wrench in the works of his enemies, not to mention, some of his friends. I suspect that the threats of tariffs are actually part of a larger geopolitical play, one where the endgame is not yet clear to the rest of us.
Tariffs have traditionally failed throughout history. That being said, the tariffs could cause a problem in the market. It should be noted, however, that thus far, steel and aluminum stocks have not wildly sold off.
So what is a tariff? It is a tax on imports. Tariffs are usually installed for one or both of the following reasons: To make money or to protect industry from competition.
The idea of taxing imports would naturally infer that whoever is importing these goods is going to be tax. The president seems to suggest implementing a 25% tax on steel and a 10% tax on aluminum. The long-term goal, in theory, is that by creating less supply as far as imports are concerned, it will generate increased supply within the United States by stimulating production to fill demand.
In other words, importers will not want to pay this needless extra tax on imports, and instead manufacture more items here.
However, the criticism is that this will totally fail. The reason is that we have a trade imbalance is because it is cheaper to obtain these items overseas. These might be things like raw materials that are not as readily available here in the United States, and as such, cost more.
So all this would theoretically do is raise the manufacturing costs for companies dealing in any kind of steel or aluminum.
Obviously, if those costs go up, one of two things will happen. It’s possible that it will lead to layoffs and job losses at companies for whom these costs suddenly increase and/or will be passed on to the consumer. This would ultimately raise the prices of the many different types of products that are created with steel and aluminum.
Both appear to be bad for business.
The other side of the argument is that domestic producers of steel and aluminum will now have a level playing field with their foreign competitors, who are providing these materials at lower costs.
Nucor Corporation (NYSE:NUE), for example, may very well come out ahead in this circumstance. The company has steel mills, it makes steel products, provides raw materials, and its business is highly directed toward automobiles, construction and energy. As it happens, these are the three sectors that use the most steel. The same goes for United States Steel Corporation (NYSE:X).
It is the automobile manufacturers themselves that may end up experiencing a double whammy. First of all, the costs for steel and aluminum would go up. Therefore, the cost of vehicles to the consumer will go up.
That will depress demand, primarily for new cars, and possibly push more people into used cars. That will in turn increase the cost of used cars.
The other problem for auto manufacturers is that companies like General Motors Company (NYSE:GM) and Ford Motor Company (NYSE:F) are actually heavily dependent on auto exports. Therefore, countries that export to China, the country against whom these tariffs are directed, may suddenly find themselves hit with a retaliatory tariff.
Let’s also remember that the millions of cans of beer that Americans love to enjoy every year are all made of aluminum. You can bet that companies like Anheuser-Busch Inbev NV (ADR) (NYSE:BUD) are going to be very upset about this. And other aerospace and defense contractors like Boeing Co (NYSE:BA), Lockheed Martin Corporation (NYSE:LMT) and Northrop Grumman Corporation (NYSE:NOC) will all be rather upset by these developments.
Personally, I am not much for auto manufacturing stocks anyway, so I don’t really care about that. I’ve never really gone for any of the steel or aluminum companies because they are too cyclical for my tastes.
But I am concerned about beverage makers and the defense and aerospace sectors. These are long-term growth prospects and this tariff move could harm them significantly.
So for now, I will wait and see what happens. You may want to go long the steel and aluminum companies for a trade, but set stop losses. We aren’t sure if this tariff approach will even happen, so stay alert.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at [email protected].