(Bloomberg) -- A return to the White House for Donald Trump poses a risk to the US stock market, according to Ralph Schlosstein, the chairman emeritus of Evercore Inc.
The former president’s tariff proposals — including a 10% across-the-board tariff on imports from other countries and as much as 100% on goods from China — would hurt equities as those tariffs are likely to accelerate inflation, the former Evercore chief executive officer said.
Tariffs also fuel the risk of the global trade war “which clearly is not in the interest of global growth or markets,” Schlosstein said in an interview. “Of the policies of the two candidates, that’s the one that stands out as being the most negative for the market.”
The Trump trade has been driving up bond yields. For Schlosstein, that means earnings will be discounted at higher rates, translating to lower stock prices. While the Federal Reserve is unlikely to raise interest-rates in a direct response to Trump tariffs, a hike can’t be ruled out if inflation eventually spikes, according to the cofounder of BlackRock Inc. That would be another blow to equities.
Meanwhile, the impact of immigration is largely being overlooked by both parties. If Trump had deported people “that would’ve had a really bad effect on economic growth,” as the labor force and productivity has helped the US economy to surpass Europe and Japan, according to Schlosstein.
Even more important is the growing budget gap and how US the addresses it.
“We have an unsustainable fiscal policy,” Schlosstein said. “Neither party seems to be particularly focused on addressing that at the moment,” Trump’s policies, especially tax cuts, would drive the deficit higher, he added.
At some point “it’ll end ugly,” he said pointing to 2011 when the US’s credit rating was downgraded by S&P Global Ratings, stressing financial markets. A global trade war or a weakening dollar with foreign investors potentially pulling away from US Treasuries could trigger another downgrade.
Still, a recession over the next year is unlikely, according to Schlosstein. US stocks will keep moving higher as long as the economy and earnings remain in a good shape, while the Fed’s first rate cut would give stocks a boost.
Ultimately, “the fundamentals of the economy and earnings will drive the market, not who’s president,” Schlosstein said.
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