The new administration has made no secret of how much of a role tariffs will play in the coming months, and their intention to wield them against trading partners across the globe. With the announcement on February 1st of additional tariffs on Canada, Mexico, and China we are already getting a taste of the possible effects to come as we feel the increased volatility in the market. Of course, this has many investors wondering what all this will mean for the stock market going forward and, more specifically, their investment portfolios.
Tariffs, essentially taxes on imported goods, can have a cascade of effects on businesses and the overall economy. They can lead to higher prices for consumers (inflation), disrupt supply chains, and potentially spark retaliatory tariffs from other countries, leading to trade wars. All of these possibilities create uncertainty, and the market hates uncertainty.
So, what happens to stocks when tariffs loom? We only have to look back to 2018 to gain some perspective on how tariffs can impact markets. The US began targeting China with tariffs imposed across a wide range goods, resulting in a significant increase in market volatility. The next couple years saw a further escalation as China and the US traded additional retaliatory tariffs. Ultimately, however, a trade agreement was reached in 2020, and both the US and China saw higher cumulative returns over this period, despite the prior two years of uncertainty. While we can’t expect an exact repeat, we do believe that markets are efficient and forward looking, absorbing new information and reflecting it in market prices. Trying to time the effects of this new information however is like trying to time any other market event. You might guess right once or twice, but eventually, you’ll get caught on the wrong side of a trade.
This is precisely why having a long-term investment plan is so crucial. Trying to time the market based on geopolitical events like tariff announcements is a recipe for disaster. Here’s why sticking to your plan is the best approach:
· Diversification: A well-diversified portfolio, spread across different asset classes (stocks, bonds, real estate, etc.), can help weather the storms of market volatility. If one sector is negatively impacted by tariffs, others may remain relatively unscathed. Holding a large number a varied assets will ensure you’re not caught on the wrong foot by over or under performing market segments.
· Long-term perspective: The stock market has historically trended upwards over the long term, despite numerous economic and political upheavals. On average the S&P 500 posted positive calendar year returns over 73% of the time over the past century. Trying to consistently predict short-term market fluctuations is an exercise in futility. Focus on your long-term goals and tune out the noise.
· Avoid emotional decisions: Market dips can be scary, especially when fueled by news headlines about tariffs. But reacting emotionally and selling your investments during a downturn can lock in losses. A well-defined investment plan helps you stay disciplined and avoid impulsive decisions. Emotions are the enemy of any investor.
While the uncertainty surrounding tariffs can be unsettling, it shouldn’t disrupt your investment strategy. Instead of trying to predict the future, focus on what you can control now: your asset allocation, your diversification, and your long-term perspective. By sticking to your plan, you can navigate market volatility and stay on track toward your financial goals.
