Since the trade war began in March, consensus expectations for growth have been revised down, and consensus expectations for inflation have been revised up, see the first chart below. This is the definition of stagflation: higher inflation and lower growth.

Under stagflation, with higher rates and slower growth, investors should stay away from growth equity and growth credit and be up in quality and invest in companies with earnings to protect against the downside risk of a recession, see the second chart.

This happens to also be how investors in public markets are positioned. Short interest in small-cap companies is at the highest level seen in many years, see the third chart. This is not surprising as 40% of companies in the Russell 2000 have negative earnings, and middle market and small-cap companies are hit by the triple whammy of higher tariffs, slower growth, and higher rates because of inflation staying higher for longer.

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Almost 80% of job openings in the US economy are in businesses with less than 250 workers, and the share of job openings in small businesses has been growing over the past five years, see chart below.

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The OECD Trade in Value-Added database is a dataset developed by the OECD and the WTO to track the flow of goods and services across international borders, particularly focusing on the value-added contributions of different countries to global exports. Approximately 20% of US car exports comes from input imported into the US, see chart below. Across a broad range of products, the foreign value added in US exports is between 10% and 20%.

Put differently, introducing tariffs and increasing the price of US imports is going to have negative consequences for exports, in particular in the auto sector.

At a broader level, today’s dialogue should focus not only on the impact on goods imports and exports, but on long-term competitiveness, and my colleague John Zito wrote about that here.

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