Before going any further, I must say that I don’t believe Protectionist Donald really will go all the way with his present attempt to strangle global trade. I believe that the end run will be quite similar to what it was with the steel and aluminum tariffs — which is to say, a photo op in the Oval Office. Some modest concession that President Trump can extract from China that cosmetically provides an appearance of strength or winning will likely prove to be adequate, substance and ideology be damned. The possibility exists that I am wrong, but there is ample support for the idea that optics trump all else.
Now, let’s look at this from the perspective of the congressional midterms, and assume we really are going to fight a protectionist turf war with global trading partners for the foreseeable future. The politics will prove brutal.
The basic line of reasoning is as follows:
• The president’s approval rating is in the high 30s, as low as any incumbent party will ever be facing in a midterm election. The Democratic enthusiasm levels are enormous. The special-election results, particularly in Pennsylvania’s 18th congressional district, are catastrophically alarming.
• And yes, a strong economy can overcome a lot of political and electoral headwinds. The economy is strong, and many key data points will prove such even in November.
• But the economy has to feel strong to voters for that to matter, and I do not mean that in a macro sense. Low unemployment, high industrial production, expanding real GDP, etc. are all mostly undetectable in a micro sense. So voters have to feel a strong economy. It has to be tangible.
• As I will lay out in a moment, the lion’s share of this will come down to the stock market. And this tariff mess is a direct hit on Trump’s stock-market success, undermining perhaps the last best hope for a 2018 midterm talking point.
In 2004, the Kerry campaign went to the wall to pin a challenging economy on Bush . . . The problem was — voters didn’t (yet) feel it! Stocks were flying out of the late-2002 bottom; interest rates were low; home equity was expanding mightily. Inversely, today, interest rates are moving higher (and it matters not that this is a good thing); home prices are leveling; and the real talking point for the Trump administration has been, yep, the stock market!
If there isn’t fear of a full-blown trade war, there’s certainly fear of perpetual volatility around protectionist poking.
And by talking point, I mean repeated 800x by Trump himself! And for good reason — the market flew from November 2016 through January 2018, led by a surge in business optimism, deregulation, and the supply-side business tax cuts. The overall economy is good, and the stock market helps people feel it, and in feeling it, it helps them believe it. But the market is now down 2,500 points in less than two months, and the vast majority of that is in direct response to sudden fears of a global trade war. If there isn’t fear of a full-blown trade war, there’s certainly fear of perpetual volatility around protectionist poking. A genie has left the bottle that markets had become content would stay put. And until markets feel resolution around this legitimate threat, elevated volatility should be expected.
So this brings us to the midterms. A denial that Republicans face a wave-election threat is a delusion so severe it requires medication. The antidote to this wave threat is the Trumpian economy and solid messaging around tax reform. That messaging needs connectivity, and that connectivity needs the stock market.
Investors ought to hope the president’s rhetoric, threats, and announcements are nearing an end, or will prove to be far more bark than bite (which is both my hope and my forecast). But beyond investors, Republican voters should be hoping for the same thing — and quickly.