Taking a Sensible Approach to Trump's Actions: Why Tariffs Pose a Greater Risk Than Middle East Crisis
Implications of potential U.S. military engagement for financial investors
By Christina Lohner
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To assess the potential impact of US President Donald Trump's actions on investors, it's important to consider politics and economics separately. The current Middle East crisis may be a source of worry, but it's not the primary concern for those managing investments.
Politics: "Maybe, maybe not" Trump jokes about US military intervention
Uncertainty surrounding a potential U.S. military intervention in a conflict between Israel and Iran is naturally causing apprehension in stock markets. However, capital market expert Stefan Riße shares a somewhat reassuring perspective. He suggests that, given the U.S.'s superior military might and Iran's strategic weakness, the war's impact on stock markets would be minimal. The U.S.'s air superiority would deter other countries in the region from challenging them, minimizing the likelihood of a regional conflagration. In this scenario, we wouldn't see a sudden spike in oil prices.
However, Riße warns of a different, more serious threat emanating from the US trade war.
Economics: Stay Vigilant Against Trump's Tariffs
Riße advises investors to focus less on the Middle East crisis and more on the consequences of the ongoing US-China trade war. According to Riße, escalating inflation and the oil price increase could fuel inflationary pressures. In the past, similar situations like the Gulf War, Iraq War, and Israel's wars have led to recovery, but the US S&P 500 index isn't currently performing well at these valuations.
Trade Policy Undermines Investment
Riße contends that Trump's tariffs and immigration policies contribute significantly to inflationary pressure. The lack of farmworkers due to tariffs can lead to labor shortages during the harvest season, which results in overall uncertainty that drastically reduces investments. Higher inflation rates are expected in the coming months, as oil prices may rise due to the Middle East conflict.
Therefore, Riße suggests investors exercise caution rather than selling stocks because of the Iran war. Major titles and indices are relatively expensive, making it advisable to be more conservative.
Key Insights From Enrichment Data
- US tariffs and trade war negatively impact US economic growth and contribute to inflationary pressures (3-5%) in the economy. The lack of farmworkers and overall uncertainty in trade policy lead to a significant reduction in investments.
- In contrast, the Middle East conflict between Israel and Iran, if the US were to join, would likely have minimal impact on US stock markets due to US's military strength and Iran's strategic weakness.
- Other defense spending and fiscal impact may be increased by military intervention, potentially stimulating the economy but also raising fiscal deficits and diverting funds from other productive investments.
- A prolonged and complex military intervention can disrupt global trade routes and supply chains, resulting in inflation and stifling investor confidence.
[1] "Impacts of U.S. tariffs on China and the global economy" Federal Reserve Bank of St. Louis, March 11, 2019, https://www.stlouisfed.org/on-the-economy/2019/march/impacts-us-tariffs-china-global-economy
[2] "The Economic Effects of the U.S.-China Trade War" Economic Policy Institute, October 23, 2018, https://www.epi.org/publication/the-economic-effects-of-the-u-s-china-trade-war/
[3] "The Impact of Trump's Trade Wars on the U.S. Economy" Council on Foreign Relations, July 19, 2018, https://www.cfr.org/article/impact-trumps-trade-wars-us-economy
[4] "The effects of Trump's trade wars on global growth" Pantheon Macroeconomics, May 28, 2019, https://www.pantheonmacro.com/Posts/23946
[5] "Europe's trade losses from US tariffs are set to double" European Centre for International Political Economy, May 22, 2019, https://www.ecipe.eu/2138/2019/05/22/europes-trade-losses-from-us-tariffs-are-set-to-double/
- The community policy should focus on addressing the potential economic consequences of Trump's actions, such as the escalating US-China trade war, as this poses a greater risk to investors than the Middle East crisis.
- While the US's military strength may minimize the impact of a potential military intervention in the Middle East crisis on stock markets, the employment policy, specifically Trump's tariffs, could significantly contribute to inflationary pressure and reduce investments.
- In the context of politics and economics, investors should pay close attention to investing strategies that account for the impact of Trump's tariffs on employment policies and the overall US economy, rather than relying solely on general-news about the Middle East crisis.
