Trump has been telling us who he is all along; I should have listened. A story in pictures

FEMALE VOICE:  This podcast has been prepared exclusively for institutional, wholesale, professional clients, and qualified investors only as defined by local laws and regulations.  Please read other important information which can be found on the link at the end of the podcast episode.

MR. MICHAEL CEMBALEST:  Good morning, this is the June 2019 Eye on the Market podcast.  Like a lot of people, I had underestimated the chance that the tariff war would get as bad as it is now given the problems that it creates for U.S. businesses and their supply chains, for the stock market, which just had its worst May in 50 years, for Republicans in the Senate who object to them, for some of Trump's closest advisors who have written extensively in the past on the problems with protectionism and tariffs, and the problems that it creates for the president's own political ambitions in 2020.  

Turns out the president is willing to risk all of that, at least for now.  And a few years ago, Trump was telling people that if he were president, he would take in hundreds of billions in tariffs from countries that are screwing us.  That's a quote from a speech he gave to the Conservative Political Action Conference in D.C.  And he was telling us who we was all along, and I should have listened to him.  Now perhaps some of these tariffs will be negotiated down or away after the June G20 meetings in Japan.  Maybe some of the Mexico ones will be blocked by Congress.  There's a little bit of a revolt in the Republican Senate taking place there and maybe the Fed will ease.

And if any of those things occur, equity should snap back a few percent after the decline recently.  But even so, the broader message right now is that the U.S. equity market does not deserve 17 or 18 times PE multiples anymore, not with the president willing to go against market orthodoxies so readily.  A 6 to 8% return from here to the end of the year on the S&P 500, it looks to be a pretty optimistic forecast, which is what we had been assuming.  And from where we sit right now, there's downside risk as well depending very much on what the president says and does as well as from the tech antitrust issue, which I'll talk about a little bit later.

In this week's Eye on the Market, we have a bunch of charts where we review a slew of leading indicators, all of which are weakening as the trade war takes its toll.  You can check these charts out; they speak for themselves.  Global activity surveys on services and manufacturing, employment, new export orders, bilateral trade between the U.S. and China, different surveys of U.S. manufacturing activity and capital spending, global semiconductor sales, the usual suspects, all of those leading indicators are weakening right now, some of them to the lowest points that they've been since 2010 or so.  

We've also got an early read on the fact that since tariffs have been implemented, a lot, the actual spending and employment data in the U.S. in the categories affected have actually been weaker than the rest of the market.  So there's early evidence that the tariffs are not even delivering the spending and/or employment objectives that they were designed to achieve.

If you look at all the tariffs that have been proposed and add them all up, it would put tariff levels at pre-World War II levels.  And so I think at this point, we've reached the stage where there's a lot of risk to market sentiment going forward depending upon, on a very much binary basis, whether the president follows through on these things or not.

We also have some charts in here on how the White House may be underestimating the risk of Chinese retaliation.  If you look at the U.S./China trade deficit, it's let's say 3 to $350 billion.  That completely disappears once you include the in-country sales of U.S. subsidiaries operating in China.  So in other words, China exports a lot of goods and services to the United States, but the U.S. sells a lot of goods and services within China, and all of those companies are now exposed to retaliation.  A lot of those companies happen to be tech firms who are taking it on both ends now because in the United States, there's an increasing focus on an antitrust issue with the tech companies. 

And give me just a minute to explain what I think is going on.  In the middle of the 20th century, economists and legal scholars from the Chicago School shifted the whole focus of government antitrust investigations from the overall market dominance concept, which had existed since the late 1800s, to a consumer welfare concept, meaning price levels.  So in other words under the latter consumer welfare approach, today's big tech companies may be completely obliterating their competition, but they're improving consumer welfare in the process through lower prices, a shift back to the former approach, which a lot of legal scholars are now saying is important.  It could spell big trouble for these tech companies since it reestablished the importance of maintaining a competitive market structure and deterring predatory conduct even if low prices in these sectors happens to remain.  So that's the big risk for these tech companies because it would shift the whole focus of antitrust investigations from market dominance, from consumer welfare prices back to market dominance.

We also have some charts this week on some of the issues that have led to the Mexico tariffs being proposed as it relates to border apprehensions, asylum applications, and how the credible fear asylum process works.  All of those things are accompanied as well with the table on the temporary protected status program that the Trump administration is seeking to terminate for about 4 or 500,000 people, mostly from Central America.  And we conclude with a discussion on how to think about that in the context of a falling U.S. fertility rate that is now well below a replacement rate, which has an important context for future growth and productivity.

So to conclude, I think it's been a long time since we've had a market that is sitting on an issue that is this binary, which is does this trade war get softened or eliminated in some way, in which case I would expect a lot of leading indicators and profit projections to rise again.  And I would expect a lot of people who have been exiting the market to go back in, and the market would resume an upward trajectory.  Or does this tariff war linger for a while or maybe even get worse, in which case there is downside risk ahead? 

And the lesson that I have learned is that I have been underestimating just how committed Trump is to this tariff mission.  And so on the margin, I'm nervous about the ability to achieve the 6 to 8% return that we're projecting from here by year end, which is looking to be an increasingly optimistic forecast.  Obviously we'll keep a close eye on any changes in the trajectory of this tariff war and update you as necessary.  We will probably have an additional read on where things stand after the June G20 meetings in Japan.  Have a great week.

FEMALE VOICE:  Michael Cembalest's Eye on the Market offers a unique perspective on the economy, current events, markets, and investment portfolios and is a production of J.P. Morgan Asset and Wealth Management.  Michael Cembalest is the chairman of market and investment strategy for J.P. Morgan Asset Management and is one of our most renowned and provocative speakers. 

For more information, please subscribe to the Eye on the Market by contacting your J.P. Morgan representative.  If you'd like to hear more, please explore episodes on iTunes or on our website.  This podcast is intended for informational purposes only and is a communication on behalf of J.P. Morgan Institutional Investments Incorporated.  Views may not be suitable for all investors and are not intended as personal investment advice or as a solicitation or recommendation.  Outlooks and past performance are never guarantees of future results.  This is not investment research.  Please read other important information which can be found at


Click above to hear J.P. Morgan Eye on the Market's "Listen when people tell you who they are" podcast episode and subscribe via Apple Podcasts or Google Play.

I had underestimated the chances of an escalating tariff war given the problems it creates for US businesses, for the stock market, for Republicans in the Senate who object to them, for some of Trump’s closest advisors and for the President’s 2020 political ambitions. Turns out the President is willing to risk all of that, at least for now. As far back as the 1980’s and again in 2011, Donald Trump was telling people that if he were President, he would take in “hundreds of billions in tariffs from countries that are screwing us”, and that he would start with a 25% tariff on China. Trump has been telling us who he is all along; I should have listened to him.

Perhaps some tariffs will be negotiated down after the June G20 meetings in Japan, or blocked by Congress; or perhaps the Fed will ease. If either occurs, equities should snap back a few percent after the recent decline. Even so, the US equity market does not deserve 17x or 18x P/E multiples any more, not with the President willing to go against market orthodoxies so readily. A 7%-9% return from today’s S&P 500 level by year-end is now our optimistic outlook, with downside risk possible depending on what the President says/does as well as from the tech anti-trust issue.