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We’re still reeling from last night’s first presidential debate of the 2024 election season. President Joe Biden and former President Donald Trump spent the evening mostly criticizing each other (and even arguing about golf handicaps).
Tariffs have been a hot topic in policy discussions, with both candidates proposing steep tariffs on imports, with Trump taking the tougher stance of the two, reminiscent of policies that sparked the U.S.-China trade war.
As we head into November, experts are warning that President Trump’s proposals could have dire economic consequences. The new worry? A stock market crash.
Will a Trump victory cause a stock market crash?
As a presidential election approaches, it’s not uncommon to see predictions of a market crash. Indeed, campaigns follow a time-honored tradition of describing the inevitable economic catastrophe that would occur if their opponent wins. But in this case, Trump’s tariff proposals could very well push the U.S. economy toward that exact scenario.
Let’s analyze what’s wrong here.
It’s important to recognize that Trump is not the only politician who has embraced tariffs. In fact, Biden recently imposed new tariffs on a wide range of Chinese imports as a way to protect the interests of American workers and businesses. But Trump’s plan is arguably more extreme. The former president plans to impose a 10% tariff on Chinese imports. all A 60% tariff would be imposed on goods imported from China, and he goes so far as to say that these tariffs would replace the US federal income tax.
On the debate stage, CNN Host Jake Tapper asked Trump if the proposed tariffs would affect consumer prices, to which he replied no, emphasizing that he believed higher tariffs would give the US more negotiating power.
I’m not the only one who isn’t convinced: “Tariffs will pose a headwind to the performance of stocks with high international revenue exposure due to the risk of retaliatory tariffs and rising geopolitical tensions,” a team of strategists at Goldman Sachs wrote this week. They went so far as to say that tariffs are the “biggest” election-related risk facing the stock market.
By comparison, Biden’s latest tariffs only cover about 4% of Chinese imports, so the impact on the economy will be much smaller. Consumers will likely see small price increases while the tariffs remain in effect through 2026, according to estimates from the Council on Foreign Relations, but they would be unlikely to cause a stock market crash.
What’s next?
As Goldman argues, if the proposed tariffs go ahead, a second Trump term could push the U.S. economy to a dangerous brink. These tariffs would likely lead to significant price increases that would be passed on to consumers. And while some stocks do well in periods of higher inflation, most do not, as consumers lose purchasing power.
The combination of inflation from tariffs and geopolitical tensions from retaliation could easily send markets crashing. Stock markets are often less adversely affected by the approach of a presidential election. According to a World Bank study, “market returns are typically more driven by trends than by election outcomes.” Following this logic, if Trump wins, the uncertainty surrounding tariffs will only exacerbate the broader macroeconomic headwinds facing U.S. investors.
As of the date of publication, Samuel O’Bryant did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the author in accordance with InvestorPlace.com’s publishing guidelines.
