Trump Administration’s Tariffs Spark Market Volatility and Economic Concerns
The Trump administration imposed 25% tariffs on imports from Canada and Mexico on March 4, along with an additional 10% tariff on goods from China, raising the total tariff on Chinese-made goods to 20%. Following this announcement, both Canada and Mexico quickly retaliated with tariffs on U.S. imports, heightening tensions and causing fluctuations in the stock market.
Major market indexes experienced significant declines after the tariffs were enacted. The S&P 500 (SNPINDEX: ^GSPC) fell by 2.96% as of this writing since the tariffs took effect. Similarly, the Nasdaq (NASDAQINDEX: ^IXIC) dropped approximately 2.98%, while the Dow Jones Industrial Average (DJINDICES: ^DJI) decreased by 3.01%.
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Many investors are feeling anxious about the market’s direction. Here is a look at how these tariffs may impact the economy and some strategies for safeguarding your investments.
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Potential Economic Impact of Tariffs
Tariffs can influence the economy and the stock market in various ways, mainly through increased costs that may lead to inflation. Ryan Monarch, an economics professor at Syracuse University, explained in a recent interview with The Motley Fool, “Tariffs cause the price of affected goods to rise. Research from the 2018-2019 trade war indicates that prices of U.S. imported goods faced by tariffs increased nearly in full proportion to the tariffs imposed, indicating that U.S. importers absorbed much of the cost.”
Furthermore, he noted, “The short term will likely bring significant uncertainty about future trade policies, resulting in reduced investment and production among many companies. Over the long term, inflation expectations may fluctuate, and as consumers start expecting inflation, it could prompt the Federal Reserve to adopt stricter tightening measures.”
With current inflation already precarious, tariffs may worsen the issue. A study from the Federal Reserve Bank of Boston predicted that these tariffs could lead to an increase in core inflation rates by 0.8 percentage points.
Rising inflation could pressure the Federal Reserve to implement more drastic strategies to control prices, particularly after recent unexpected increases in inflation rates that reversed a trend of gradual declines.
Strategies to Safeguard Your Investments
When the market experiences downturns, remaining composed and avoiding impulsive decisions is crucial.
It’s uncertain how long this downturn may last, or if it may develop into a more serious bear market or recession. Selling your stocks in panic could be detrimental if market conditions rebound quickly. For instance, during the market’s decline in March 2020 triggered by COVID-19 concerns, investors who held onto their positions reaped significant rewards when the market rapidly recovered.
^SPX data by YCharts.
Instead of fleeing the market, concentrate on bolstering strong investments. Companies with solid fundamentals are better equipped to endure economic rough patches, even if they experience short-term struggles. Important indicators include a competitive edge in their industry and a knowledgeable leadership team to navigate challenging landscapes.
Market downturns are a natural cycle, and historically, every bear market has been succeeded by a bull market. Regardless of the challenges, even severe downturns are temporary.
^SPX data by YCharts.
This is an opportune moment to reassess your emergency fund. If stock prices continue to decline, selling stocks at a loss can be detrimental, locking in steep losses. A robust emergency fund allows you to retain your investments, even in the face of unexpected expenses.
Investors face a challenging environment, and feeling uncertain is common. However, focusing on high-quality companies, avoiding panic-driven selling, and retaining a long-term perspective can significantly enhance your ability to navigate market volatility and protect your investments.
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Katie Brockman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
The views and opinions expressed herein reflect those of the author and do not necessarily represent those of Nasdaq, Inc.
