Despite a wobble at the very end of the year, American investors remain in an exuberant mood. The results of Bank of America’s closely watched survey of fund managers found them in a mood best described as near-euphoric or “super bullish” in the words of the firm’s investment strategist.
Allocations to cash fell to record lows amongst those surveyed in December whilst bets that US equities would outperform other global markets rose to decade highs. Market positioning, in short, is broadly following the lines of the so-called Trump Trade which gripped Wall Street in the second half of 2024. As On Global Markets noted following the election:
Broadly put, the idea has been that a second term for Donald Trump would be great news for American equities, bad but not necessarily terrible for bonds, and positive for the dollar. The logic being that a combination of corporate tax cuts and deregulation will juice stock market returns whilst also sending the government’s deficit up and putting pressure on Treasury yields. Higher American yields should give the dollar a boost.
Another way to think of the logic behind the Trump Trade is as an implicit belief that President Trump will push hard for what the markets broadly want (notably tax cuts and deregulation) whilst being more restrained when comes to measures that might hit growth such as deporting hundreds of thousands of workers or moving too quickly on tariffs.
Sitting behind the market positioning in US equities is a belief that US growth will accelerate in the near future. Deficit funded tax cuts might provide a short term fillip at the cost of higher debts and higher interest rates in the medium term but weighing against that is the impact of tariffs. Before Christmas, the Clark Center’s US Experts Panel took a deeper dive into the specifics. The results were instructive.
Starting with the relatively narrow issue of solar technology, the panel was asked whether “doubling existing tariffs on imports from China of critical production components in solar energy manufacturing will provide a substantial boost to employment in the domestic ‘cleantech’ sector over the next five years”.
This cuts to the heart of the debate, will insulating American firms from foreign competition see a notable increase in domestic production?
Weighted by confidence, 2% of respondents strongly agreed, 17% agreed, 32% were uncertain, 43% disagreed and 6% disagreed. Whilst there was no consensus, the balance of expert opinion disagreed with the proposition amid a high level of uncertainty.
As David Autor, of MIT, noted there are some strong continuities between the policies of the first Trump administration and that of the Biden White House when it comes to competition with China, especially in areas of technology. As he argued “So far, we see no evidence that Trump/Biden tariffs have led to manufacturing rebound. Meanwhile, subsidies from IRA appear to be working well, as measured by dramatic increase in US manufacturing investment. Trump will likely eliminate those, however”.
Larry Samuelson, of Yale, summed up well the uncertainties involved, noting that “tariffs will prompt substitution from Chinese to domestic manufacturers of some products, but will also raise domestic prices. The net effect on domestic production and employment is unclear”.
James Stock, of Harvard, was one of those agreeing that such tariffs would boost domestic employment in solar manufacturing, although he did note that employment levels were low in any case, “”Substantial”: By standards of this industry which is capital not labor intensive. Module production has shifted in response to tariffs. Cell production might if there aren’t ways to get around the tariff. Total solar employment is likely to fall if you include installers”.
Stepping back from the specific case of tariffs on solar energy components, the panel also considered the broader topic of tariffs and growth. Asked whether “Disruptions to global supply chains from new tariffs and trade wars will lead to measurably slower global growth over the next five years” there was a greater degree of consensus.
Again weighted by confidence, 24% of respondents strongly agreed, 59% agreed, 15% were uncertain and just 2% disagreed. Amongst those expressing uncertainty, several respondents noted that their uncertainty flowed from the uncertainty as to whether there would be a global trade or not rather than the impact of any such trade war on global growth. As Anil Kashyap, of Chicago Booth and Clark Center Co-Director, put it whilst strongly agreeing “what mechanism says this will be good for global growth?”
Taken together the results fit well with previous expert polling on the impact of tariffs – in each case, tariffs impose costs on firms and households across the economy and whilst they may, in some cases, lead to higher employment in one industry (and this is far from certain) the benefits are usually outweighed overall. The downsides become larger still if tariffs provoke retaliation with a strong consensus that trade wars are a drag on overall global growth.
To return briefly to the euphoria in markets gripped by the Trump trade, this then is the problem. The prospects of tax cuts and deregulation may well have excited investors but tariffs risk a much longer running growth problem.
