The dust is still settling after last night’s presidential debate – the first of the 2024 election season. President Joe Biden and former President Donald Trump largely spent the evening taking jabs at each other (and even discussing golf handicaps).
When it did come down to policy discussions, tariffs did get some time in the spotlight. Both candidates have suggested imposing higher tariffs on imported goods. Of the two, Trump is taking a harsher stance, harkening back to policies that triggered the U.S.-China trade war.
Ahead of November, experts have warned that Trump’s proposals could have dire economic consequences. A new one on the table? A stock market crash.
Will a Trump Victory Trigger a Stock Market Crash?
Predictions of a market crash aren’t uncommon in the build up to a presidential election. In fact, campaign teams embrace the time-honored tradition of illustrating the economic catastrophe that will inevitably ensue if the other party wins. But in this case, there is a legitimate possibility that Trump’s proposed tariffs will push the U.S. economy toward exactly that scenario.
Let’s break down what is at stake here.
It’s important to acknowledge that Trump isn’t the only politician who has embraced tariffs. In fact, Biden recently implemented new tariffs against a wide range of Chinese imports, framing them as a means of safeguarding the interests of both American workers and businesses. But Trump’s plans are undeniably more extreme. The former president has outlined a 10% tariff on all imported goods with a 60% tariff levied at China. He has gone so far as to say these tariffs would replace the U.S. federal income tax.
On the debate stage, CNN moderator Jake Tapper asked Trump if his proposed tariffs would impact consumer prices. Trump responded that they would not, focusing instead on his belief that higher tariffs would give the U.S. more power, presumably for negotiating.
I’m not alone in remaining unconvinced. This week, a team of Goldman Sachs strategists wrote that “Tariffs would create a headwind to the performance of stocks with high international revenue exposure due to the risk of retaliatory tariffs, as well as heightened geopolitical tensions.” They went so far as to say that tariffs were the “biggest” election-related risk that the stock market faces.
In comparison, Biden’s recently raised tariffs will have a much smaller impact on the economy, as they cover only about 4% of Chinese imports. As the Council on Foreign Relations estimates, consumers will likely see minor price increases as the tariffs roll into effect through 2026, likely not enough to usher in a stock market crash.
What Comes Next
As Goldman argues, the U.S. economy could be pushed to a dangerous brink under Trump’s second term if proposed tariffs materialize. These tariffs would more than likely lead to significant price increases passed off to consumers. And while some stocks perform well in periods of high inflation, the majority do not, as consumers have less spending power.
Combined, tariff-induced inflation and the geopolitical tensions from retaliatory action could easily thrust the market into free fall. The stock market often isn’t too negatively impacted by an approaching presidential election. A study from the World Bank shows that “market returns are typically more dependent on trends rather than election results.” By that logic, if Trump wins, tariff uncertainty will only add to the broader macroeconomic headwinds facing U.S. investors.
On the date of publication, Samuel O’Brient did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
