Economists differ on how much blame the Smoot-Hawley tariffs deserve for the Great Depression. They also disagree on how much credit President Franklin Roosevelt deserves for the Reciprocal Tariff Act, which put the U.S. on a path to lower tariffs.
But the stock market had no trouble choosing sides.
A look back at two pivotal bills — the Smoot-Hawley Act and the Reciprocal Tariff Act — and the Dow’s reaction, might serve as a cautionary tale for President Trump.
Put simply, the stock market doesn’t like tariffs, and if Trump pushes it too far, he could sink the stock market.
Let’s look at key news events surrounding the protectionist Smoot-Hawley bill that President Hoover signed in 1930 and the more free-trade oriented Reciprocal Tariff bill that FDR signed in 1934.
The Stock Market Reaction To Tariffs: A Dow Jones History
The circumstances listed here do not prove causation. That’s for economists and historians to settle. Stock analysts are interested in only one thing: How did the market react?
Here’s the evidence:
May 28, 1929: House passes Smoot-Hawley legislation, (1) but it’s not clear that it will become law.
Oct. 21, 1929: Senate rejects move to limit tariffs to agriculture.
Oct. 28, 1929: A delegation of senators urges Hoover to push through the tariffs. Hoover agrees.
Oct. 29, 1929: Stock market crashes (2).
March 24, 1930: Senate passes Smoot-Hawley bill.
May 4, 1930: 1,028 economists warn Hoover against tariffs.
June 17, 1930: Hoover ignores economists and signs Smoot-Hawley (3).
The economy skids. GDP drops 8.5% in 1930, 6.4% in 1931 and 12.9% in 1932.
July 8, 1932: With Hoover’s policies failing, the Tariff Commission trims 18 tariffs.
FDR Unwinds Hoover Tariffs
Sept. 19, 1932: Presidential candidate FDR calls tariffs “the road to ruin.”
March 4, 1933: FDR becomes president (4).
June 12, 1934: President Roosevelt signs the Reciprocal Tariff Act to cut tariffs (5).
The economy rebounds: GDP grows 10.8% in 1934, 8.9% in 1935 and 12.9% in 1936.
What can an investor conclude from this? Expectations surrounding Smoot-Hawley affected the market. And the run-up to the Reciprocal Trade Act triggered a rally.
Circumstances, though, differ today. The U.S. economy is growing. Yet, other things are similar. In 1930, 1,028 economists warned Hoover in a letter. On May 3 of this year, 1,140 economists echoed history when they warned Trump not to take the tariff path.
There’s no sign the recent letter had any more effect on Trump than it did on Hoover.
Trump still has time to correct the mistake. But if he doesn’t settle the tariff issue, the stock market could face trouble. Unless Trump’s stance on tariffs proves to be a negotiating ploy, his tariff stance will create regime uncertainty in the stock market.
One Voice For 200 Years
Economists “have spoken with almost one voice for some 200 years” on the negative consequences of tariffs, Milton Friedman once said in a video. Likewise, Paul Krugman, a liberal economist, called tariffs “a big, bad deal” in a New York Times article in September. For the most part, there is no right or left on tariffs.
The Market Since The First Shot In Tariff War
Trump began slapping on tariffs Jan. 23, 2018, when he put them on washing machines and solar panels. Many more tariffs have been added since.
How has the stock market fared since that first tariff shot heard around the world? The Nasdaq has gained 7%; and the S&P 500, 2%. The Dow Jones Industrial Average has been flat, and the small cap Russell 2000 is down 2%.
From Trump’s inauguration Jan. 20, 2017 to the last stock session before the tariff war started, the Nasdaq rose 33%; the Dow Jones, 32%; the S&P 500, 25%; and the Russell 2000, 19%.
Versions of this article ran June 8, 2018, and Dec. 24, 2018. Follow Whitfield on Twitter at @IBD_PWhitfield for more on stocks and the market.
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