How do tariffs affect the stock market?
No one can predict with certainty how the stock market will react to economic changes in the short term or long term. However, many experts expected that tariffs would cause the stock market's performance to suffer, and they were proven right in the immediate aftermath of new tariffs taking effect.
Increased import prices means obtaining raw materials or even finished goods becomes more expensive, eating into company profits. Added costs could be passed along and reflected in the sticker price. These inflated prices can affect consumers' ability to make purchases. Furthermore, retaliatory tariffs by other countries affect American businesses that rely on exporting goods, potentially reducing profitability.
A prolonged reduction in economic activity — spurred by low demand and resulting layoffs — can lead to a recession.
If the economy goes into a recession and profits suffer, the stock market will inevitably perform poorly, with share prices tumbling amid the economic problems.
Trump has introduced a level of uncertainty that's led to increased market volatility as companies and investors react to his evolving policies. For example, twice already he has delayed a number of tariffs set to be imposed on Canada and Mexico, while continuing to threaten steeper levies. This has seemingly made investors nervous, leading to reduced interest in equity investments and panic selling, which only drives share prices down further.
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Learn MoreWhat should investors do?
All investors may be affected — at least in the short term — by the stock market declines that tariffs could bring.
While growth investors may view a stock market crash as a buying opportunity, dividend investors are often looking for stability and may be especially distressed by the current situation.
So, what should investors do? For starters, consider placing any money intended for the short term into a safer investment vehicle, such as a high-yield savings account or certificate of deposit.
For long-term investors, a diversified portfolio can shield you from being overexposed to any particular industry — especially sectors like agriculture, automotive, basic metals and refining, which could be affected the most by tariffs.
According to experts from Fidelity, adding some minimum volatility ETFs might be a good idea for investors uncomfortable with the chaos. Meanwhile, brokerage firm Edward Jones notes small and mid-cap stocks could see their prices remain more stable than trade-sensitive sectors, as they typically derive less than 30% of their revenue abroad. Investment-grade bonds also provide diversification benefits.
However, for investors with a long timeline, reacting to short-term market shifts is a losing battle, experts say. You might be better off staying invested for the long haul if you're confident your portfolio is well-diversified and provides an appropriate level of risk given your investing timeline.
If you can afford to weather the storm, you may be able to come out ahead in the end.
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