- The Dow Jones is on a strong bull run and Dennis O’Leary says markets aren’t likely to react as badly to new tariffs.
- Tariffs should be considered a value-added tax (VAT) since the U.S. is the only country in the G7 that doesn’t utilize it.
- No Fed rate cut in December is now a variable, but it has already been priced in.
Even if the U.S. government impose additional tariffs on Dec. 15, Kevin O’Leary says markets won’t react as badly as anticipated. Such resilience would further boost sentiment around the Dow Jones.
I think you’re going to be surprised the market won’t react as badly as people are anticipating even if we ramp up December 15 tariffs.
Why does the stock market continue to advance in the face of even more tariffs on Chinese goods? pic.twitter.com/MoY5rwSDnn
— Kevin O'Leary aka Mr. Wonderful (@kevinolearytv) December 9, 2019
Here are three major reasons why prominent investors like O’Leary expect the Dow to maintain its momentum despite threats of more tariffs.
#1: Tariffs are really a VAT
According to O’Leary, another way to look at tariffs on China is to consider them as value-added tax (VAT). He explained that the U.S. is the only country in the G7 that excludes a VAT.
“We’ve been ratcheting on tariffs but the markets keep just marching north. Here’s my new thinking on this. We’re the only country in the G7 that doesn’t charge a VAT tax. What are these tariffs? these tariffs are actually a value added tax. That’s the way to look at them except only on Chinese products,” he said.
While tariffs carry a negative image as a countermeasure against competing economies, if they are considered a VAT, they may not be such a bad thing after all, O’Leary says.
Global markets—including the Dow Jones—have shown no visible response to the imminence of Dec. 15 tariffs. It indicates that investors do not see major changes to the state of the U.S. stock market regardless of the new tariffs.
#2: Treasury has more funds to help struggling sectors from tariffs
O’Leary noted that if more tariffs are introduced, the Treasury will have more funds to support negatively impacted sectors.
Even if more tariffs come, it’s not as damaging as we thought. And, the Treasury ends up with a value added tax of billions of dollars to be redeployed to help sectors that aren’t doing well, like farmers.
Farmers and manufacturers have been the two most heavily affected industries throughout the entire trade dispute. The Dow has shrugged off the concerns altogether. Any support for major industries from the Treasury or monetary policy is likely to sustain the current Dow Jones rally.
Reports show that farmers across the U.S. are supportive of President Trump, and are willing to wait for a better deal.
#3: Fed’s accommodative stance benefits Dow
Solid job numbers from November may have prevented the Federal Reserve from pursuing a final rate cut before the year’s end.
However, the unlikelihood of an additional cut on the benchmark interest rate has been predicted in recent months. History shows that when the Fed cuts rates three times and pauses, positive market growth follows. As such, the extent to which the market considers a no-rate-cut December as a potential variable to the Dow Jones is likely to be overplayed.