The Trump tax cuts were a boon for the economy. Small businesses could afford to hire more people, unemployment fell, and the stock market soared. But will the Trump trade wars undo all that good work?
According to JP Morgan, the cost of Trump’s trade wars on U.S. equities has been $1.25 Trillion. By calculating the loss in value of market capitalizations when Trump tweets about a new tariff, analyst Marko Kolanovic has quantified precisely how much value destruction has taken place.
But JP Morgan’s quantitative analyst didn’t stop there. He further assessed that the upside for the markets was 4% and the downside was a tail-risk event. Think Black Swans and 1987-like stock market crashes for examples of tail risk.
Now you might be forgiven for thinking this is just anti-Trump rhetoric. But keep in mind that Kolanovic went against the conventional grain early on and bet President Trump would win the election. And he further bet that the markets would rally following a Trump victory.
Why would Trump pursue such a self-defeating strategy? It’s possible that his eyes are on jobs only. It’s true that tariffs and protectionist strategies can save jobs for some time. But he might be missing the opposing benefit, which is global trade leads to lower prices for consumers and drives more consumption.
In an economy that is primarily consumer-based, the danger of setting tariffs is consumers buy less and the economy turns down as companies suffer from lower demand.
So, if the upside is 4% and the downside is a big stock market crash, the question is what should you do?
If you have own stocks, the very least you could consider is to sell calls against stocks you own as part of a covered call strategy. Plenty of good covered call screeners exist to help you find ways to lower risk on stocks you own.
At times of heightened uncertainty it’s also wise to lighten the load, meaning if you are contemplating a big purchase, evaluate the merits of a dollar cost averaging strategy instead. While you’ll always miss the bottom, you will equally also miss buying at the top when you leg in over time.
Until the trend starts to turn in earnest there is no reason to short the stock market. But you can keep your finger on the trigger to go bearish when the time is right. That could mean buying put options, selling stock short, or simply selling call options.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.