Morgan Stanley
Wealth Management

How Trade Policy Could Affect Your Investments

Oct 9, 2024

As the U.S. presidential election nears, tariffs and trade policy are among the most sensitive to the election’s outcome and could have a notable impact on the economy and your portfolio. Here’s what investors should know.

Author
Monica Guerra, Head of Policy, Morgan Stanley Wealth Management

Key Takeaways

  • Trade policy is among the top policy areas that may be most sensitive to the presidential election result.
  • The impact of tariffs on the economy could be wide-ranging, pressuring consumers and affecting growth, inflation and stock market performance.
  • Vice President Kamala Harris’ trade policy appears to be a continuation of President Biden’s, but is still opaque, creating some uncertainty for investors.
  • Former President Donald Trump’s trade proposal includes increasing tariffs on China as well as a universal tariff, which could pressure productivity, growth and add inflationary pressure.
  • Investors can mitigate the impact of tariffs by considering defensive sectors such as Consumer Staples, Health Care and Utilities, as well as select retailers with less exposure to offshore production.

With less than a month left until the U.S. general election, investors are interested in the long-term economic and market-related impacts of the two candidates’ trade policies. In particular, each candidate’s position on tariffs could have a broad impact on the economy, gross domestic product (GDP), inflation, market performance and household expenses.

Where does each candidate stand on trade and tariffs?

The presidential candidates have varying views on trade policy, including the use of tariffs.

  • Vice President Kamala Harris has provided little guidance on her perspective, but has not expressed a desire to change the current tariff structure, which indicates that her policies may remain largely consistent with those of the Biden administration. Biden has mostly upheld the tariffs originally put in place by the Trump administration in 2020. However, without more detail from Harris regarding trade and tariff policy, there could be a potential risk for investors seeking to mitigate exposure to certain policy changes.
  • By contrast, former President Donald Trump has put forth plans for an aggressive tariff regime. His proposals include raising tariffs to 60% on Chinese goods and introducing a universal tariff in the 10%-20% range. An aggressive tariff regime could increase US inflation and negatively impact productivity and growth.

 

Based on the details both candidates have outlined thus far, here are four takeaways investors should know.

  1. 1
    How have existing tariffs affected households?

    While the existing tariff regime may not have fanned broad inflationary pressures, it did translate to higher costs for U.S. consumers. The Tax Foundation determined that the current tariffs—introduced during the Trump administration and continued under Biden—along with China’s retaliatory responses, resulted in what may be considered an $80 billion annual tax on U.S. citizens and an estimated $200 to $300 in annual costs per household, on average. Importantly, these estimates may understate the impact of existing tariffs due to shifting consumer choices or reduced income from lower output.  

  2. 2
    How could a change to tariff policies impact inflation?

    While trade policy would likely stay consistent under a Harris administration, Trump’s proposed tariff hikes could increase U.S. inflation and negatively impact productivity and growth. In an assessment of Trump’s proposed plans, an increase of tariffs to 60% on China and a 10% universal tariff would add 2.5% inflation and reduce GDP by 0.5% in the first two years of being enacted. 

  3. 3
    Would an increase in tariffs hurt the U.S. economy and/or stock market?

    The impact of tariffs varies depending on the business cycle, with their introduction having a greater drag on productivity when the economy is in expansion. According to a 2019 study by the International Monetary Fund, a 5% increase in tariffs during economic expansion could decrease productivity by approximately 1% over five years. On the other hand, tariffs are found to increase productivity when the economy is in contraction, but results were not found to be statistically significant. Tariff increases thus have a greater negative effect on productivity during favorable economic conditions, and little positive impact when tariffs are levied during recessionary periods.

     

    The impact of tariffs on the stock market also varies. Certain industries, such as the solar and steel industries, have taken a particular hit from increased tariffs. For example, in January 2018, the Trump administration imposed tariffs on solar panels and washing machines of 30% and 50%, respectively. In March of the same year, the administration imposed a 25% tariff on steel and 10% on aluminum from most countries, covering an estimated 4.1% of U.S. imports. Following these measures, both solar and steel companies underperformed the S&P 500 until mid-2019.   

  4. 4
    How can I potentially reduce the impact of tariffs in my portfolio?

    Although the candidates’ trade policies are still evolving, there is a notable divergence between their approaches. While Harris’ trade policy is likely to mirror the current environment, she has not revealed much about her plans for tariffs, creating some uncertainty for investors. On the other hand, Trump’s proposal for increased tariffs may drag productivity and growth, and add inflationary pressure. Should tariffs rise and economic conditions weaken, investors can consider defensive sectors such as Consumer Staples, Health Care, Utilities and select retailers with less exposure to offshore production.

     

    Connect with your Morgan Stanley Financial Advisor to explore investing strategies that might make sense for you. Learn more in Morgan Stanley Wealth Management’s report, “US Policy Pulse: Tariffs for All?”

Wealth Management Five Reasons DIY Investors Choose Morgan Stanley Financial Advisors Why DIY investors have confidence in the investing decisions they make together with a Morgan Stanley Financial Advisor. Get the facts
Wealth Management Election 2024: Investors’ Top Questions Answered The outcome of this year’s U.S. election could have a big impact on taxes, Social Security and health care policy. What should investors know?
Research Charting Strategies for a Multipolar World The transition to a multipolar world requires a de-risking of global supply chains and a refocus on research and development as companies and nations compete for emerging technologies.
Five Reasons DIY Investors Choose Morgan Stanley Financial Advisors
Wealth Management Five Reasons DIY Investors Choose Morgan Stanley Financial Advisors
Election 2024: Investors’ Top Questions Answered
Wealth Management Election 2024: Investors’ Top Questions Answered
Charting Strategies for a Multipolar World
Research Charting Strategies for a Multipolar World

Discover more

 Insights to help you go further.

Wealth Management Portolio Insights Morgan Stanley Wealth Management

Index Definitions

For index, indicator and survey definitions referenced in this report please visit the following:

https://www.morganstanley.com/wealth-investmentsolutions/wmir-definitions

Risk Considerations

Equity securities may fluctuate in response to news on companies, industries, market conditions and general economic environment.

Growth investing does not guarantee a profit or eliminate risk. The stocks of these companies can have relatively high valuations. Because of these high valuations, an investment in a growth stock can be more risky than an investment in a company with more modest growth expectations.

Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets.

International investing entails greater risk, as well as greater potential rewards compared to U.S. investing. These risks include political and economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets and frontier markets, since these countries may have relatively unstable governments and less established markets and economies.

Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies. Health care sector stocks are subject to government regulation, as well as government approval of products and services, which can significantly impact price and availability, and which can also be significantly affected by rapid obsolescence and patent expirations.

Environmental, Social and Governance (“ESG”) investments in a portfolio may experience performance that is lower or higher than a portfolio not employing such practices. Portfolios with ESG restrictions and strategies as well as ESG investments may not be able to take advantage of the same opportunities or market trends as portfolios where ESG criteria is not applied. There are inconsistent ESG definitions and criteria within the industry, as well as multiple ESG ratings providers that provide ESG ratings of the same subject companies and/or securities that vary among the providers. Certain issuers of investments may have differing and inconsistent views concerning ESG criteria where the ESG claims made in offering documents or other literature may overstate ESG impact. ESG designations are as of the date of this material, and no assurance is provided that the underlying assets have maintained or will maintain and such designation or any stated ESG compliance. As a result, it is difficult to compare ESG investment products or to evaluate an ESG investment product in comparison to one that does not focus on ESG. Investors should also independently consider whether the ESG investment product meets their own ESG objectives or criteria. There is no assurance that an ESG investing strategy or techniques employed will be successful. Past performance is not a guarantee or a dependable measure of future results.

The indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. The indices are not subject to expenses or fees and are often comprised of securities and other investment instruments the liquidity of which is not restricted. A particular investment product may consist of securities significantly different than those in any index referred to herein. Comparing an investment to a particular index may be of limited use.

The indices selected by Morgan Stanley Wealth Management to measure performance are representative of broad asset classes. Morgan Stanley Wealth Management retains the right to change representative indices at any time.

Disclosures

Morgan Stanley Wealth Management is the trade name of Morgan Stanley Smith Barney LLC, a registered broker-dealer in the United States. This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy.  Past performance is not necessarily a guide to future performance.

Morgan Stanley Smith Barney LLC, its affiliates and Morgan Stanley Financial Advisors do not provide legal or tax advice.  Each client should always consult his/her personal tax and/or legal advisor for information concerning his/her individual situation and to learn about any potential tax or other implications that may result from acting on a particular recommendation.

This material, or any portion thereof, may not be reprinted, sold or redistributed without the written consent of Morgan Stanley Smith Barney LLC.

© 2024 Morgan Stanley Smith Barney LLC, Member SIPC.

CRC#3920754 (10/2024)

View Disclosures Close Disclosures