Stock Market Insights: Ceiling and floor, the new global tariff framework

Dr. Richard Baker, AIF®, is the CEO and executive wealth advisor at Fervent Wealth Management.

Our youngest will graduate from high school this coming Saturday. Yesterday, he gave his last major presentation and aced it. When he got home, he flopped on the couch with a huge sigh of relief that the worst was over. I think investors did the same thing after the news of the U.S./China tariff agreement.

Investors and retailers worldwide received some encouraging news following the recent meeting between the U.S. and China. The two countries, which happen to be the world’s two largest economies, agreed to lower tariff duties for 90 days.

In the deal, the U.S. lowered its tariff rate on China from 145% to 30%, and China lowered its tariff rate on the US from 125% to 10%, which was a more aggressive cut than analysts had expected. This led the S&P 500 back in positive territory for the year, the dollar to rally to a one-month high, and short-term treasury yields to spike. Though only temporary, this initial agreement could have long-term benefits.

The tariff rate on China is the highest on any major country and much higher than the 10% tariff rate on Britain announced last week. While the China agreement is only temporary and Britain’s is the final deal, they may still be creating a tariff ceiling and floor. 

No one is surprised that China’s tariff agreement represents the ceiling (highest tariffs). It is closer to being an enemy than just a competitor. Businesswise, China has become the world's leader in cheap manufacturing, which has flooded global markets and bankrupted many companies that can’t compete with the sweatshop wages of Chinese workers. Democrats and Republicans agree that the U.S. needs to lessen its dependence on Chinese suppliers.

The UK (Britain), having the lowest tariffs, represents the new worldwide tariff floor. While the UK is America’s ninth-largest trading partner, between Vietnam (eighth) and India (10th), the U.S. and the UK are long-time allies and have a mostly balanced trading relationship. Under the UK agreement, most British products will have the global 10% tariff, but their steel and aluminum will be exempt from Trump's 25% levy. Likewise, the UK peeled back its tariffs on U.S. beef imports from 20% to zero.

The news that China tariffs will be rolled back bodes well for the stock market for the rest of the year. Now that companies have more time to adjust their supply chains to be less reliant on China, earnings forecasts look reachable. However, the bigger significance is that other countries now see that the Trump administration is willing to negotiate and can now negotiate between the tariff floor and the ceiling.

How important is the China agreement? Now that China’s tariffs have been significantly reduced, the threat of a U.S. recession seems unlikely. The current tariff rates are manageable, allowing markets to focus more on tax cuts and deregulation and less on trade uncertainty. The market looks much better, but the risks can’t be dismissed completely. These tariff agreements could still blow up, causing tariffs to go up again. For now, stocks are back to positive territory, and gold prices have plunged as the need for a safe haven has lessened, and most investors are sighing with relief.

After dinner, we bought him some frozen custard to celebrate finishing his high school work. He looked at the sweet treat and said, “This day just keeps getting better.” Hopefully, investors feel the same way.

Have a blessed week!

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Opinions voiced above are for general information only and not intended as specific advice or recommendations for any person. All performance cited is historical and is no guarantee of future results. All indices are unmanaged and may not be invested directly.

The economic forecast outlined in this material may not develop as predicted and there can be no guarantee that the strategies promoted will be successful.

Fervent Wealth Management is a financial management and services entity in Springfield, Missouri.