Monday’s trading session was marked by significant downturns following President Trump’s tariff announcement aimed at Mexico, Canada, and China.

Initially, the major indices saw sharp declines, but they managed to recover somewhat when news broke that the tariffs on Mexico would be delayed. Ultimately, the S&P 500, Dow Jones Industrial Average, and NASDAQ closed down 0.8%, 0.3%, and 1.2%, respectively.

This unexpected move caught many off guard, signaling a departure from predictable norms in trade discussions.

Despite the panic, the markets often react instinctively to such news. Although this current tariff situation remains fluid, it’s crucial to view the ongoing volatility in context. Such fluctuations can be alarming, but do not let them cloud your judgement.

In this edition of Market 360, we will outline the developments in the tariff situation thus far. Additionally, we’ll discuss why investors ought to maintain focus amidst distractions like these.

The Current State of Tariff Discussions

On Monday, President Trump announced a 25% tariff on the U.S.’s two largest trading partners, Canada and Mexico, alongside a 10% tariff on China. These tariffs were set to begin on February 4, but last-minute negotiations led to a delay for both Mexico and Canada, allowing for further discussions on border security measures.

Initially, the stock market reacted negatively, reflecting the uncertainty surrounding the announcement. However, it became clear by mid-day that the tariffs were part of a strategy to negotiate better terms.

President Claudia Sheinbaum of Mexico spoke with President Trump that morning to encourage a delay, offering to increase border security by deploying an additional 10,000 National Guardsmen. Meanwhile, Canada, albeit slower in response, came to an agreement following two conversations between Prime Minister Justin Trudeau and President Trump that included plans for heightened border security resources.

Currently, tariffs against China remain in effect, indicating ongoing tension in trade relationships.

As investors digested these developments, initial losses in the stock market began to moderate. It became apparent that President Trump had made his intentions clear in negotiations, prompting concerns among other trading partners.

Many analysts, including myself, have noted that Trump’s tariff threats are a key part of his negotiation approach, aiming to unsettle counterparts to secure advantageous agreements. His overarching goal appears to be leveling the playing field for American industries, especially in manufacturing.

Trump’s Long-Term Objectives

A notable objective for President Trump is to stimulate the manufacturing sector in the U.S. by encouraging companies to relocate operations from Canada and Mexico. Ending the ongoing manufacturing downturn has been a central theme of his economic agenda.

The recent ISM manufacturing report indicated growth within U.S. manufacturing for January, with a PMI reading of 50.9, signifying positive expansion trends.

Commerce Secretary Howard Lutnick has mentioned that tariffs predated income taxes in the U.S., suggesting that increasing tariffs could potentially aid in financing federal expenses and lowering income tax burdens for Americans.

Looking ahead, the impact of tariffs will unfold in two possible scenarios: Companies might shift their operations back to the U.S., spurring economic growth, or tariffs could inadvertently trigger inflation and hinder expansion.

Evaluating Tariffs and Their Inflationary Potential

Many investors have raised inquiries regarding the connection between tariffs and inflation. As of now, only tariffs on China are in play, and China’s responses have included minor counter-tariffs. These moves, including a 15% tariff on U.S. coal, appear largely symbolic rather than substantive.

Relations between the U.S. and China involve significant complexities that could lead to strategic negotiations down the road, rather than solely retaliatory actions.

Given the current strength of the U.S. dollar against the Chinese yuan, the likelihood of tariffs causing inflation seems low. Additionally, President Trump’s commitment to controlling inflation aligns with economic sentiments from leading economists, who have recently revised their GDP growth forecasts above a 3% annual rate for the coming year, while also anticipating lower inflation rates.

In essence, President Trump’s tariff initiatives may be more about redirecting trade negotiations than imposing lasting economic burdens on the U.S., suggesting that an inflation spike is unlikely in the near future.

Staying Focused Amid Market Noise

Change can be challenging, especially when distractions like tariffs impact market views. They should not deter investors from maintaining a clear focus.

My advice is straightforward: During uncertain times, it is crucial to stay disciplined. Seek out fundamentally strong companies that might be temporarily affected by market fluctuations to capitalize on potential opportunities.

Remind yourself that we are amidst a robust earnings season. According to FactSet, around one-quarter of S&P 500 companies have reported earnings this quarter, with approximately 80% surpassing analyst expectations.