Trump's trade war: Why isn't Wall Street worried?

Investors seem to think that Trump's tariffs are "much ado about nothing," but U.S. stocks are not immune to further shocks from tariffs or other policy proposals, and Trump may be more emboldened to test extreme measures because of the relatively calm stock market reaction.

The global trade war does not seem to scare Wall Street.

On Thursday (February 13th) local time, U.S. President Trump announced that he would explore how to impose reciprocal tariffs on U.S. trading partners, which is another major factor that may lead to the gradual escalation of the global trade war he launched.

However, the S&P 500 index closed up 1% at 6,110 points on the day, close to the historical high of 6,118.71 points set on January 23. The Dow Jones Industrial Average closed up 0.8%, and the Nasdaq Composite Index closed up 1.5%.

Investors seem to think the tariffs are "more noise than rain," said George Young, partner and portfolio manager at investment advisory firm Villere & Co.

Stocks rose because the executive order did not immediately lead to tariffs as investors and foreign leaders feared, and other tariff-related actions were considered less severe than initially proposed.

Earlier this week, Trump announced a 25% tariff on all steel and aluminum imported into the United States. Earlier in February, Trump announced a 25% tariff on Canadian and Mexican goods and a 10% tariff on Chinese goods. Trump quickly pressed the "pause button" after Canadian and Mexican leaders pledged to take steps to strengthen border enforcement and combat drug trafficking.

But Yang believes that the rise in the stock market does not mean that the market is immune to further shocks from tariff measures or other policy proposals.

He said: "We know that this has become a new normal. The stock market has not gotten rid of the problem of tariffs, but is absorbing it little by little while waiting to see what kind of policies will be implemented."

Indeed, although stock market bulls are jumping for joy, the tariff issue is far from being resolved. Senior White House officials told reporters that reciprocal tariffs may take effect in a few weeks or months, and the US government will first review the countries with the largest trade surpluses with the United States.

Paul Ashworth, chief North American economist at Capital Economics, pointed out that the Trump administration seems to have abandoned its call for a general tariff of 10% to 20% on imported goods, but the broad criteria set by officials to evaluate new tariffs may lead to larger increases in average tariffs and US consumer prices.

Matt Eagan, portfolio manager at Loomis, Sayles & Company, believes the tariff threat is one of "many paradoxes" embedded in Trump's agenda that are difficult to unravel and could cause stock markets to fluctuate wildly from time to time.

Eagan wrote in a research note, "Extending tax cuts may stimulate consumption, but it will also lead to a worsening of the fiscal deficit; immigration controls may tighten the labor market, but they will also lead to higher wages; tariffs may trigger a trade war while suppressing demand and raising prices. We believe that investors should look through the noise and focus on Trump's goals and constraints. His actions may be 'more noise than rain', but we advise investors not to become complacent."

Christopher Smart, managing partner of geopolitical risk consulting firm Arbroath Group, warned that investor complacency could become part of a dangerous feedback loop. "It's hard to know what tariffs will ultimately be implemented, or how high they will be, but it's a safe bet that a lot of them will go into effect, and at the same time, given the relatively muted reaction from investors so far, Trump may be emboldened to test extremes," Smart said.