A doom-and-gloom mindset has returned for Wall Street and for many Americans who have looked at their investment portfolio balances recently. That's not surprising, given that over $3 trillion in value was wiped out overnight following President Trump's "Liberation Day" tariff announcement.
The Dow Jones Industrial Average (^DJI 0.32%), the S&P 500 (^GSPC +0.51%), and the Nasdaq Composite Index (^IXIC +1.10%) are now firmly in correction territory. Some economists are warning that the chances of a recession have increased significantly.
But I won't add to the despondency many investors are feeling. Instead, I'm going to go in the opposite direction. Believe it or not, I can envision a scenario where President Trump could ignite a stock market surge. Actually, I can think of two ways he could turn the lemon the stock market has been so far in his second term into lemonade.
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Trump ends up being proved right
On Feb. 25, the president handed out red caps in the Oval Office that blared the phrase, "TRUMP WAS RIGHT ABOUT EVERYTHING." The first scenario where Trump could kick off a stock market surge is if those caps turn out to be prophetic about his trade policy.
Trump genuinely appears to be convinced that tariffs will successfully boost the U.S. economy. The White House issued a statement last week stating that "tariffs work" and arguing that the results from tariffs in the first Trump administration prove it. In particular, the White House maintained that tariffs won't lead to higher inflation.
Commerce Secretary Howard Lutnick told CNBC he anticipates that Trump's tariffs will cause most countries to re-examine their trade policies that negatively affect the United States. He believes that this will set the stage for increased U.S. exports.
The president also recently said, "You're going to see billions of dollars, even trillions of dollars coming into our country very soon in the form of tariffs." He proposed that this money could be used to help reduce the national debt and lower income taxes.
No impact on inflation, more U.S. exports, a lower national debt, and tax cuts. That sounds like a recipe for a booming stock market, right?
The art of the deal
Now for another scenario. Although Trump administration officials have indicated that there's no room for negotiating on the announced tariffs, that might not be the case. The president said he's open to negotiations if countries make "phenomenal" offers.
It seems like ancient history now, but the stock market soared following Trump's election in November. Sure, candidate Trump had pledged to impose steep tariffs, even saying, "'Tariff' is the most beautiful word in the dictionary." However, many investors and Wall Street analysts didn't believe he would deliver on those campaign promises. Some thought Trump would simply use the threat of tariffs as a negotiating tactic to get other countries to open up their markets.
What if this is exactly what happens? The president first rattles the world and stokes fears of a global trade war. He then announces either individual meetings with the leaders of the largest U.S. trading partners or a big powwow with everyone present.
Maybe the U.S. wins significant concessions; maybe not. It doesn't matter. Either way, Trump could declare victory. Most, if not all, of the tariffs are lifted. Investors breathe a huge collective sigh of relief and begin shifting money on the sidelines back into stocks. Voila! President Trump ignites a stock market surge.
How likely are these scenarios?
Am I being delusional with these two scenarios? Probably. I'm not sure that either is likely.
Most economists agree that tariffs will lead to higher inflation. Despite the White House's claims, the tariffs in the first Trump administration, which were relatively limited compared with the latest across-the-board tariffs, did raise prices on the products affected, according to the U.S. International Trade Commission.
At least so far, more countries seem to be ready to retaliate against the president's tariffs than moderate their trade policies as Lutnick predicts they will. U.S. exports could decrease rather than increase, which wouldn't be good news for many stocks.
White House trade advisor Peter Navarro estimates tariffs will generate an additional $600 billion to $700 billion per year in revenue -- $6 trillion over the next decade. Moody's chief economist Mark Zandi disagrees. He told CNBC that range "is not even in the realm of possibility." He added, "If you get to $100 billion to $200 billion, you'll be pretty lucky." If Zandi is right, that's not enough to make a needle-moving dent in the national debt or pay for major tax cuts.
I'm very doubtful that the rosy picture the Trump administration has painted for tariffs will play out. The scenario by which one or more trade deals are reached with the stock market soaring afterward is more likely, in my opinion. However, I'm not holding my breath for this to happen, given Trump's seeming conviction that his tariffs really will help make America great again.
But should investors be despondent? Nope. Market sell-offs present buying opportunities for long-term investors. As Little Orphan Annie sang, "The sun will come out tomorrow." We'll just have to wait and see how long it takes for tomorrow to arrive.
