I had underestimated the chances of an escalating tariff war given the problems it creates for US businesses, for the stock market, for Republicans in the Senate who object to them, for some of Trump’s closest advisors and for the President’s 2020 political ambitions. Turns out the President is willing to risk all of that, at least for now. As far back as the 1980’s and again in 2011, Donald Trump was telling people that if he were President, he would take in “hundreds of billions in tariffs from countries that are screwing us”, and that he would start with a 25% tariff on China. Trump has been telling us who he is all along; I should have listened to him.

Perhaps some tariffs will be negotiated down after the June G20 meetings in Japan, or blocked by Congress; or perhaps the Fed will ease. If either occurs, equities should snap back a few percent after the recent decline. Even so, the US equity market does not deserve 17x or 18x P/E multiples any more, not with the President willing to go against market orthodoxies so readily. A 7%-9% return from today’s S&P 500 level by year-end is now our optimistic “trade war resolved”  outlook, with downside risk possible depending on what the President says/does as well as from the tech anti-trust issue.

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