The “Newhart” Tariffs

I apologize for leading with a reference that many of you will not immediately recognize, but it is what hit me first thing this morning.  The sitcom “Newhart” is famous for its surprise ending, when the eponymous star wakes up in the set of his prior sitcom, “The Bob Newhart Show” and says to the actress who played his first sitcom wife, “Honey, wake up.  You won’t believe the dream I just had.”  Some investors must be thinking the same thing about tariffs today.

As you undoubtedly know by now, the U.S. Court of International Trade unanimously ruled that the bulk of the “Liberation Day” tariffs were unconstitutional.  While I was aware that the tariffs were facing legal challenges almost from the get-go, I have to admit that I was unfamiliar with this facet of the federal judiciary, nor did I know that a three judge panel was preparing a ruling. (Two of the three judges were appointed by Republicans, including one during the first Trump administration.) 

I was having supper with my family when the headlines crossed our phones, and by the time I clicked on the story, global markets had begun to react positively.  ES and NQ futures were already higher after well-received results from Nvidia (NVDA) and Salesforce (CRM), but the tariff news sent them into overdrive.  When I went to sleep (too late) and woke up (too early) ES futures were up about +1.5% along with Asian indices like Japan’s Nikkei 225 (+1.88%) and Hong Kong’s Hang Seng (+1.35%).  But rather than pushing even higher, we saw pre-market US futures and European markets give back much of their gains by the US open, and we actually saw the S&P 500 (SPX) and Nasdaq 100 (NDX) both slip into red for a brief time around noon EDT.  (Also, the early enthusiasm for CRM ebbed, with the stock’s post-market gains slipping to a -5% loss this morning, though NVDA is holding onto a +4% gain.)

Why then do we see a lackluster response from US stocks by early afternoon?  I attribute it to four factors:

1. The administration is committed to fighting the ruling.  The brief dip into negative territory came after news reports that the Trump administration will ask the Supreme Court to intervene if a federal appeals court fails to put aside the trade court’s ruling. 
2. The administration will undoubtedly try to utilize tariff methodologies that might be permissible.  Not all the announced tariffs are subject to this ruling.  Those that are specific to industries or countries can remain in place, such as the auto and steel tariffs.  The methodology might adapt to more targeted or temporary measures that might still have significant economic consequences. 
3. The budget bill relies on tariff revenue to help offset the deficit increases that are inherent in the proposal.  Although bond yields are falling this morning on the reduced inflationary pressures, might the bond vigilantes get concerned about the prospect of even higher deficits?
4. Most of the good news was already priced in.  Markets had already decided that the worst of the tariffs were unlikely to come to fruition and gave passes to many companies that paused guidance until the tariff situation clarified itself.  Thus, we end up with something resembling a “sell-the-news” event.

Thus, was the whole episode about tariffs just a weird dream?  Not yet. There are still many moving parts to the issue.  But it seems like at least a modest positive so far, which is how equity markets are treating these events.