Buffett says tariffs are an act of war, Trump and U.S. stocks honeymoon is over

Negative factors have come together at the worst possible time, and investors' complacency has disappeared, and they are finally starting to take Trump's tariff threats seriously.

Buffett recently called tariffs an "act of war" that could further fuel inflation. After digesting a lot of information in recent weeks, the US stock market seems to agree with this statement, and the stock market fell again on Monday (March 3).

After the US presidential election, experts have given many reasons not to worry about what Trump will say. Instead, they believe that economic stimulus measures such as deregulation will become the most prominent mark of this Trump administration, rather than trade wars. Now it seems that Trump is serious about key parts of his agenda - such as tariffs - and the stock market has returned to the level of early November last year, erasing the gains after the election.

Trump said on Monday that the 25% tariff on Mexican and Canadian goods will take effect on March 4, and the stock market fell in response. The Dow fell 1.5% on Monday, the S&P 500 fell 1.8% and the Nasdaq Composite plunged 2.6%.

"I think the honeymoon period for Trump and the stock market is over," Dave Rosenberg, founder of Rosenberg Research, wrote in a research note. He noted that only 8% of stocks in the S&P 500 are at 52-week highs, far below the peak of 25% in early November last year. "The performance of stocks after this election is a far cry from the performance of Trump 1.0 during the same period...Rather than accelerating, the U.S. economy is slowing down," Rosenberg said.

For some people with good memories, this situation may not be surprising, looking back to 2018, when tariff uncertainty was the main reason for the S&P 500's decline during Trump's first term. Barron's warned in December that stocks could fall after Inauguration Day. After a painful February for the S&P 500, the stock market seems to be taking this seriously.

"The apparently measured start of Trump's tariff diplomacy 2.0, which included an easy win, delayed tariffs and less severe tariffs on China, created a complacency among investors that Trump would negotiate a deal without the massive tariffs he threatened during the campaign. That complacency is gone now," said Jon Harrison, an analyst at TS Lombard.

The White House's decision to impose an additional 10% tariff on China and move forward with 25% tariffs on Mexico and Canada has completely dashed investors' hopes that trade flows would not be disrupted too much, while gradually making the stock market take Trump's other tariff policies, such as the threat of a 25% tariff on the European Union, more seriously.

With Trump also asking the Committee on Foreign Investment in the United States to review Chinese investment in certain areas, it does not seem to be easy to make concessions to each other. Harrison wrote in the research report, "Other measures that have been announced may rekindle concerns about previously resolved issues, including compliance with accounting standards and strengthening the enforcement of regulations for Chinese companies to go public in the United States. China has stated that it will retaliate against these measures and tariffs."

Therefore, in the foreseeable future, the stock market will continue to be constrained by the tug-of-war in trade negotiations, while at the same time, other data have begun to shake investors' confidence in the US economy.

Evercore ISI analyst Julian Emanuel said: "In addition to the negative impact of the uncertainty of Trade War 2.0 on the S&P 500, inflation and large-scale government layoffs are turning on the yellow light of "soft data points" such as consumer confidence, which in turn threatens economic growth." Emanuel also pointed out that the increase in the number of people applying for unemployment benefits last week was the first crack in the "hard data" related to the health of the economy.

Simply put, all kinds of negative factors have come together at the worst time.

Dennis DeBusschere, an analyst at 22V Research, wrote in a research report, "With U.S. economic growth already slowing, trade policy has brought a shock to consumer demand - assuming that the tariff threat is implemented - increasing the probability of a negative feedback loop in the U.S. economy."

However, investors don't have to give up on U.S. stocks completely. If tariff uncertainty lingers, high volatility will continue to be a theme in the stock market. However, although the S&P 500 may fall further in the coming months, Evercore ISI's Emanuel believes that the index may still close up and reach 6,800 points this year. Barron's also believes that the S&P 500 will eventually rise for the whole year this year.

DataTrek analyst Nicholas Colas believes that even if there will be more volatility in the future, investors should take a long-term view. He wrote in a research report, "It is important to remember that in terms of stock price performance, 'American exceptionalism' is a relative/long-term concept, and there is no guarantee that the S&P 500 will outperform all competitors in any quarter. Considering the high expectations and multi-faceted policy uncertainties, the current performance of US stocks is already very good."

This may be true, but to borrow Buffett's metaphor, it does not mean that US stocks will not be hit before recovery. After all, war is not good for anyone.