It looks like the investigation into President Donald Trump’s alleged collusion with Russia is coming to a head, and there are implications for investors for whichever way it ends up going.
Suggestions of the potential firing of special prosecutor Robert Mueller are gaining steam, especially after Trump’s lawyer John Dowd voiced his hope for Mueller’s firing to the Daily Beast on Saturday. Feeling emboldened, the president has begun attacking Mueller personally on Twitter, which he hasn’t done before. It seems that the climax of this whole affair will be triggered soon, and we will know if legal action will be taken against the Trump administration, or if the entire investigation will dissolve into nothing.
Here’s why investors should care. If Trump wins this battle with Mueller, he will feel even more emboldened and powerful, and as a result he will most likely toughen his implementation of protectionist trade policies. If this happens, his main target will probably be China because the largest part of the U.S. balance of trade deficit comes from Chinese imports.
So far Trump has been very tame on actual implementation of protectionist policies, mainly going after steel and aluminum, which China has little to do with. Even the tariffs he did impose are mostly cosmetic for the purpose of saving face. Canada, Mexico and Brazil are the main exporters of steel and aluminum to the U.S., and both Canada and Mexico are exempt from the tariffs.
But if Trump is emboldened by the end of the investigation against him, he is likely to focus specifically on China, and there will probably be no significant exemptions given to the Chinese for any tariffs implemented.
The top import categories from China in 2016, according to USTR.gov, are electrical machinery ($129 billion), general machinery ($97 billion), furniture and bedding ($29 billion) toys and sports equipment ($24 billion) and footwear ($15 billion).
The most magnified positive effects of tariffs on China will be on domestic manufacturers of these products, and the worst effects will be on U.S. retail sellers of them. The selling prices for manufacturers will rise, increasing their profits, and conversely the buying prices of retailers who sell them will go up, decreasing margins. So while Trump insists that he is protecting American companies generally by instituting tariffs, he is really only benefiting some while hurting others.
Electrical equipment producers like Powell Industries Inc. (POWL, Financial) will benefit, for example, but sports equipment retailers like Dick’s Sporting Goods (DKS, Financial) and Wal-Mart Stores Inc. (WMT, Financial) that import many of their products from China will fall.
On the flipside of the coin, U.S. companies that export to China will likely get hit as the Chinese will probably quickly retaliate against tariffs imposed. These primarily include agricultural stocks like Monsanto Company (MON, Financial) and aircraft manufacturers like The Boeing Company (BA, Financial).
If, however, the Mueller investigation picks up steam as Trump fights back and leads to an impeachment or indictment, tariffs against China will be on the far backburner, and the situation will reverse. Assuming the situation will be resolved within the next few months, investors can straddle or institute a put-spread strategy on stocks that will be heavily affected either way, expecting big moves on the resolution of the Mueller probe one way or the other.
Disclosure: No positions.
