Despite a strengthening economy and historically low unemployment rates, the stock market continues to be a volatile place. Escalating tensions related to trade have influenced investors, particularly when trade tariffs are concerned. Many financial experts suggest the imposition of tariffs by the U.S., Canada, China, and the European Union and the resulting trade war signal the end of globalization.
What do tariffs mean for investors? In this article, we’ll break down some of the factors that are influencing the stock market and provide insights into making smart investment decisions even as trade fears loom on the horizon.
Tariffs and U.S. Economic Policy
In the early part of 2018, President Donald Trump announced that he would direct the federal government to impose tariffs on certain imports as a way of stimulating U.S.-based manufacturing operations. The first tariffs were targeted at Chinese imports, particularly solar panels, washing machines, and assorted consumer goods. In March 2018, tariffs on steel and aluminum imports were announced; a 25% tariff on steel imports, and 10% on aluminum imports. Further tariffs were announced in subsequent months, with focus on China and the perceived trade imbalance between the U.S. and that country.
Countries affected by the steep tariffs retaliated, imposing their own penalties on U.S. imports. China alone targeted $50 billion in exports from the U.S. initially, then raised the stakes with additional tariffs that total about $200 billion in exports. Longtime trading partner Canada also imposed tariffs on imports from the U.S., and the European Union is considering both tariffs and financial compensation from the U.S. via intervention by the World Trade Organization.
The Effect on the Stock Market
How do these tariff announcements affect the stock market? Immediately after the announcements, stock futures in the United States and in world stock trading markets tumbled before a rapid recovery. A major concern for financial analysts and for investors is the erosion of globalization. Under the globalization model, free-market principles were good for corporate profits, especially the dominant multinational players on the Standard & Poor 500 index. Companies had access to global markets and to less-expensive laborers than in U.S. manufacturing operations. With the rise of new economic players such as China, the global model is being challenged. Trade agreements between the U.S. and some of its established trading partners have been revisited, leading to an overall loss of confidence among investors.
Tariffs may ultimately disrupt global supply chains and mobility of labor. Because the rules are changing, this has effectively discouraged corporate-level investment, which has the effect of stagnating growth. Higher prices in consumer goods are an additional side effect of tariffs; taxes imposed on imports are passed along to the consumer in the form of higher costs, impacting growth forecasts and giving rise to concerns about inflation.
How Can Investors Thrive Under Tariffs?
There is still hope for investors, despite gloomy growth forecasts. Investment experts suggest that companies with little exposure to sectors impacted by tariffs may still be a solid bet for investment; an example is a company that doesn’t have to import steel or aluminum to continue its manufacturing operations, and therefore is relatively unaffected by the higher tax costs of those imports. Domestic manufacturers, or those that rely on U.S. based labor and supply chains, will also continue to thrive.
The leading takeaway from an investment perspective is to concentrate on the long term. Financial analysts continue to guide investors in building strategic, diversified investment portfolios that remain grounded in an individual’s own risk tolerance and personal financial goals, such as retirement. Policy risk may influence the stock market in a negative way now, but over the long term, such dramatic shifts will stabilize, leading to increased investor confidence.