Without a doubt, tariffs are the driving force behind the stock market’s recent volatility.
Just this week, we saw the markets rally when President Trump made comments that downplayed the significance of his April 2, 2025 “Liberation Day” plans. That’s the term that Trump is using regarding his planned announcements of new, reciprocal tariffs.
In a Newsmax interview on Tuesday, the president said, “Look, we’ve been ripped off for 45 years by other countries. We always were soft and weak. It’s almost like we had people that didn’t know what they were doing. We were just ripped off as a country like nobody has ever seen before. That’s why we have $36 trillion in debt.”
This was the messaging that we’ve come to expect from Trump regarding tariffs… and the stock market hates it.
However, he followed those comments up by saying, “I’ll probably be more lenient than reciprocal, because if I was reciprocal, that would be very tough for people.”
The S&P 500 initially rallied on that news. It appeared that Trump may have found an emphatic off-ramp for his tough-guy bravado regarding tariffs.
Unfortunately, that reprieve was short-lived.
Hours later, news broke that there were more tariff announcements on the way.
Wednesday evening the tug-of-war continued when the president announced a 25% tariff on “all cars that are not made in the United States.”
Trump’s team believes that this auto tariff could result in $100 billion-plus in annual revenue for the United States government, which will help with its deficit. But the stock market didn’t care. It sold off in response.
Announcements like this wreak havoc in boardrooms (U.S., or not). You won’t hear me say this often, but these days I feel sorry for CEOs.
Wall Street thrives on certainty. Investors want clear sales/profit guidance, and management teams simply can’t provide it because of how quickly Trump’s policies are changing global trade.
Despite the perceived chaos of the trade war, I’m not overly concerned.
Why?
Because of comments made by a hedge fund manager in an investment letter from January of 2024.
The Most Important Investor Letter That You Probably Haven’t Heard Of
If that seems oddly specific… it is. But, before I tell you why this letter is so important, let’s get into the comments that the manager made.
Regarding Trump’s second term, the letter stated:
The Key Square view also posits that both political and market analysts are incorrect in their assessment of a Trump second term. It is likely that he would seek rejuvenation/redemption rather than revenge if elected this November. A second term would be expected to embrace Calvin Coolidge-style Roaring Twenties policies over a Herbert Hoover outcome.
It continued:
Our base case is that a re-elected Donald Trump will want to create an economic lollapalooza and engineer what he will likely call “the greatest four years in American history.” Economist Ed Yardeni believes that post-Covid America has the potential to have a boom similar to the “Roaring Twenties” of a century ago. We believe that a returning President Trump would like this to be his legacy.
Regarding tariffs, the letter stated (emphasis added):
We find it unlikely that across-the-board tariffs, as currently reported by the media, would be enacted at the same time as he moves to fix the immigration crisis. The tariff gun will always be loaded and on the table but rarely discharged.
Furthermore, looking at trade policy and dollar strength, the letter said:
Another differentiated view that we have is that Trump will pursue a weak dollar policy rather than implementing tariffs. Tariffs are inflationary and would strengthen the dollar–hardly a good starting point for a US industrial renaissance. Weakening the dollar early in his second administration would make US manufacturing competitive. A weak dollar and plentiful, cheap energy could power a boom. The current Wall Street consensus is for a strong dollar based on the tariffs. We strongly disagree. A strong dollar should emerge by the end of his term if the US reshoring effort is successful.
That paints a rosy picture, doesn’t it?
But the volatility that we’ve seen in recent weeks certainly doesn’t point towards a Roaring ’20s scenario. I’m sure global automakers feel as though the tariff gun has been discharged.
It sounds like that hedge fund manager doesn’t know what he’s talking about. Rest assured, he does.
That’s because that letter was written by Scott Bessent, current Treasury Secretary and a man with a direct line to the president. Those quotes are from one of the last public investor letters that Bessent wrote to his partners at his hedge fund, Key Square Group, before leaving for his government role.
And Bessent’s comments along with Trump’s own words on dealmaking could give us a clue where this trade war is headed…
The Other Guy Smells Blood
Trump’s trade war talk could have much broader (negative) implications on economic growth and the stock market at large. However, it’s important to remember that Trump’s tariff bark may be worse than his bite (by design). That would be in-keeping with his practices as a private citizen.
In The Art of the Deal, he writes:
The worst thing you can possibly do in a deal is seem desperate to make it. That makes the other guy smell blood, and then you’re dead. The best thing you can do is deal from strength, and leverage is the biggest strength you can have. Leverage is having something the other guy wants. Or better yet, needs. Or best of all, simply can’t do without.
Access to U.S. markets is certainly something many exporting countries need, many can’t live without it. If Trump the businessman is anything like Trump the president, the large tariff threats could be a way build leverage.
What about the president’s on-again, off-again approach to this trade war? Again, this isn’t entirely different from his practices in business.
From the book:
I never get too attached to one deal or one approach. For starters, I keep a lot of balls in the air, because most deals fall out, no matter how promising they seem at first. In addition, once I’ve made a deal, I always come up with at least a half dozen approaches to making it work, because anything can happen, even to the best-laid plans.
I don’t personally know Donald Trump, but Brad does. And he had this to say in December:
[O]ne of the first rules of dealmaking is that you always negotiate from a position of strength. And your first salvo in negotiations is always asking more than you’re willing to settle for. If you’ve ever negotiated on buying a new car, you know what I mean. But in the end, you find a way to a happy middle.
When it comes to trade relations, Donald Trump has a carrot and a stick. He wants the counterparty to take the carrot. But that stick only means something if you demonstrate that you’re willing to use it.
Reading between the lines, I believe those “more lenient than reciprocal” comments are telling, because they’re in-line with the “loaded-gun” comments from Bessent, a man Trump holds in high regard. The then-candidate called Bessent, “one of the greatest on Wall Street, respected by everybody” during the presidential campaign last year.
And as president, Trump has put a lot of faith in Bessent. Here he is in a recent Truth Social post:
Unlike in past Administrations, we will ensure than no Americans will be left behind in the next and Greatest Economic Boom, and Scott will lead that effort for me.
Since being appointed Treasury Secretary, Bessent has been a stalwart advocate of the current trade policies. But his comments from his time as a hedge fund manager may be more telling of how he actually thinks away from the cameras. They shed light on his economic policy outlook and more dovish view on tariffs.
So… What’s an Investor To Do?
The purpose of this essay isn’t to advocate for any politician or policy. Our mission, as ever, is to help you navigate the market. But, like it or not, politics is having an outsized influence on stocks… and it deserves examination.
If Trump’s bark is worse than his bite, and if Bessent’s comments are telling of his long-term economic policy, then these fear-induced dips are buying opportunities.
At Wide Moat Research, we’re always on the lookout for wonderful companies trading with attractive values… and there’s more of them today than there were a few weeks ago.
As I mentioned to Brad during this week’s episode of The Wide Moat Show (catch up here), investors need a list. And that list should include wonderful companies you’ve always wanted to own but never had the chance because the valuation was never quite right.
There’s always something to worry about. But if I know anything, it’s that buying great companies, at great prices, and holding for the long-term is a great recipe for wealth generation.
That’s what we believe. I hope you feel the same.
Regards,
Nick Ward
Analyst, Wide Moat Research