Impact of Tariffs on Inflation: Insights from BNY Wealth CIO
- Investors worry that policies from President-elect Donald Trump’s second term might lead to higher prices.
- Despite these concerns, the stock market has shown resilience.
- Jim Smigiel, chief investment officer at SEI, notes that a rise in oil prices often signals increased inflation.
Impact of Tariffs on Inflation and Financial Markets
By Isabel Wang
Inflation concerns are rising in U.S. financial markets. Investors worry that policies from President-elect Donald Trump’s second term might lead to higher prices. Since Trump’s election on November 6, the 10-year Treasury yield has increased by 14 basis points. Investors fear that proposed tax cuts and tariffs could worsen the fiscal deficit and ignite inflation.
Despite these concerns, the stock market has shown resilience. The S&P 500 rose over 3% since the election. The Dow Jones Industrial Average increased nearly 5%, while the Nasdaq Composite gained 3%, according to FactSet data.
Oil Prices
Oil prices are closely tied to inflation. Jim Smigiel, chief investment officer at SEI, notes that a rise in oil prices often signals increased inflation. Last week, U.S. crude oil futures climbed 6.5%, reaching $71.24 a barrel.
Brian Szytel, co-chief investment officer at the Bahnsen Group, believes Trump’s pro-energy policies might weaken the typical correlation between oil prices and inflation. Increased oil supply from drilling could keep energy prices lower.
Gold Prices
Gold is traditionally viewed as a hedge against inflation. Recently, gold prices rose over 5% weekly, closing at $2,712.20 an ounce. Analysts attribute the surge in oil and gold mostly to rising geopolitical tensions, particularly related to Russia and Ukraine, rather than direct inflation fears.
Stock Market Insights
Historically, value stocks outperform growth stocks during inflation. U.S. large-cap value stocks did better than growth stocks in 2022, as inflation hit a 40-year high. The Russell 1000 Value Index fell 9.5%, while the Russell 1000 Growth Index dropped nearly 30%.
Currently, Szytel finds value stocks attractive due to growth stocks becoming overvalued. The Russell 1000 Value Index rose 2.4% last week, compared to a 1.7% rise in growth stocks.
Small vs. Large Caps
Small-cap stocks usually benefit from economic growth and inflation. Smigiel suggests that their recent performance could signal inflation on the horizon. In November, small-cap stocks gained significantly as Trump’s tax cuts and supply chain policies sparked optimism. The Russell 2000 index rose 4.5%, outperforming both the S&P 500 and the Nasdaq.
Tariff Effects and Market Signals
Sinead Colton Grant, CIO at BNY Wealth, states it is premature to predict that tariffs will lead to significantly higher inflation. Current market signals are unclear. She believes that the new administration is unlikely to adopt inflationary policies, given the electorate’s concerns over rising prices in past years.
Looking ahead, Wall Street is focused on the personal-consumption-expenditures price index report, due this Wednesday. A higher-than-expected inflation reading could negatively impact market sentiment.
Retail companies including Best Buy, Dick’s Sporting Goods, Macy’s, and Nordstrom are set to report earnings before the Thanksgiving holiday. Tech companies like CrowdStrike, Dell, and HP will also announce results this week.