President Donald Trump's tariffs on imported steel and aluminum have spooked investors, raising concerns that trade wars could ensue. But Joseph Davis, Vanguard's global chief economist, is unfazed by the stock-moving actions out of the White House.
In a recent interview, Davis told Investopedia that the fund company internally believes the direct effect from the currently announced tariffs should be "fairly small and trivial," noting that the impact on economic growth is basis points in size, if that. "The U.S. has the lowest tariff rates in the world, well below the G20 average," said Davis, referring to the world's 20 largest economies. "The greatest risk, of course, is trade tensions escalate."
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Earlier this month, President Trump surprised the stock markets by announcing that he was imposing 25% tariffs on imported steel and 10% tariffs on aluminum. That created a sell-off in the markets and widespread fear of a trade war breaking out. When signing the tariffs into policy, President Trump walked back the proposal a bit, providing exemptions to Canada, Mexico and Australia. The U.S. gets most of its imported steel from Canada. If foreign steel and aluminum makers charge U.S. manufacturers more as a result of the levies, the producers in the U.S. could pass those charges along to consumers. Eventually, Americans could pay more for cars and beer as a result.
Davis told Investopedia that there is a 20% to 30% chance that trade tensions escalate as a result of the tariffs but that the hit to the economy will be limited. The wildcard, noted Davis, is how other countries respond. "Whether the tariffs have any material impact on the economy largely depends on the chain reaction by other countries," he added.
Davis noted that, even with the tariff policy and the uncertainty it brings, Vanguard is sticking with its global outlook, which it issued in late December. In what was seen as its most cautious outlook in the past decade, Vanguard warned that 2018 will be marked by higher risks and lower returns, pressuring investments for equity and bond investors, largely those in the U.S . Vanguard expects unemployment to dip well below 4% and for wages to increase, along with increased inflation. As a result, the Federal Reserve will likely raise interest rates to at least 2% by the end of the year, injecting more volatility into the markets.
Vanguard's outlook for global stocks and bonds is being described by the money manager as the most "subdued" it has been in a decade, with Vanguard forecasting U.S. equity returns to be in the 3% to 5% range, which is much lower than the 10% annualized return generated over the past 30 years. Stocks and bonds outside the U.S. could see returns that are around 5.5% and 7.5%, highlighting the benefit of globally diversified portfolios in the years to come. The expected return on fixed income is muted at between 2% and 3% for the next decade, but at least it remains in positive territory.