Trump announces further tariffs, yet stock markets remain unfazed.
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Small businesses are feeling the brunt of tariffs as they have less pricing power compared to larger firms, according to the National Federation of Independent Businesses. The impact on inflation and the U.S. stock market, however, is more intricate.
Inflationary Pressures
The current impact of Trump's tariffs on inflation is not yet causing a significant surge in consumer prices. According to an inflation report published on Tuesday, fears of large immediate price increases from the tariffs may no longer be warranted. However, economists warn that this relief may be temporary, and a price increase is likely in the near future.
The rate of inflation for some goods exposed to tariffs picked up in July, but it was weaker for others, like appliances and apparel. The average effective tariff rate has risen to 18.6%, the highest since 1934, and Yale Budget Lab estimates tariffs add about $2,400 annually in costs to an average household.
Stock Market Volatility
The U.S. stock market has shown resilience, hitting fresh all-time highs on Tuesday, despite the ongoing tariff tensions. However, the S&P 500 has experienced increased volatility and investor uncertainty. The index saw sharp declines in early 2025 after new tariff announcements but later staged a strong rebound.
The Magnificent Seven tech stocks (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla) account for one-third of the weighted average of the S&P 500. If the wholesale inflation report shows more pronounced signs of inflation than Tuesday's report, stocks could quickly come down from their new highs.
Economic Outlook
The U.S. economy isn't out of the woods yet, according to Kevin Gordon of the Charles Schwab financial group. Weaker growth is not a concern at the moment, but concerns remain about weakening labor markets and worsening wholesale inflation influenced by the tariffs, which create risks for sustained stock gains.
Analysts predict range-bound equity markets unless broad trade deals improve the outlook and reduce volatility. The Federal Reserve's monetary policy is complicated by tariffs keeping inflation stubbornly above target, but weaker labor data may drive rate cuts later in the year.
Key Details
- Some companies continue to absorb tariff costs, delaying the inflation impact, but this is expected to change.
- Wholesale inflation is worsening, labor market data show signs of weakening, and S&P 500 valuations remain elevated, adding risk to the stock market.
- Economists and financial institutions remain cautious, with J.P. Morgan forecasting S&P 500 to trade within a range unless trade tensions ease and investor sentiment improves.
In conclusion, Trump's tariffs present a complex economic influence. Inflation pressures are building but not yet fully manifested in consumer prices, while the stock market is volatile and sensitive to trade policy shifts and economic signals linked to tariffs.
- Small businesses are grappling with the brunt of tariffs, despite the current inconsequential surge in consumer prices, as they have less pricing power compared to larger firms, potentially increasing debt due to added costs from tariffs.
- Economists warn that the relief from large immediate price increases from tariffs may be temporary, and a price increase is expected in the near future, which could impact retirement plans due to inflation.
- The federal reserve's monetary policy is complicated by tariffs keeping inflation stubbornly above target, and this could potentially lead to taxes increasing to fund government expenditure to control inflation.
- The U.S. economy's outlook remains uncertain, with weaker growth, worsening wholesale inflation influenced by tariffs, and elevated S&P 500 valuations presenting risks for sustained stock gains.
- Financial institutions and analysts are recommending a cautious approach to investments, with predictions of range-bound equity markets unless broad trade deals improve the outlook and reduce market volatility.
- Insurance may become essential for small businesses and individuals to protect against potential financial losses due to sudden inflationary pressures, debt, or fluctuations in the stock markets and the economy.
