Since the president has become a big proponent of these import taxes, it's unsurprising he's announced sweeping tariffs early in his term. As of April 10, there's a baseline 10% tariff on imported goods from most countries, along with a 25% tariff on steel and aluminum products, a 25% tariff on certain foreign-made vehicles and auto parts, and a minimum 145% tariff on Chinese goods. There also may be more to come, as Trump placed a 90-day freeze on previously announced reciprocal tariffs. These levies have also prompted some countries to impose retaliatory tariffs on American goods.
All of this has impacted the stock market. Trump implementing tariffs — and subsequently delaying them in some cases — has led to increased volatility. But overall, markets are down. As of April 24, the S&P 500 stood around 10% below its record high set in February. This has led investors to raise questions about whether they should change their investment strategies.
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 so far they've been proven right in the immediate aftermath Trump's tariffs announcements.
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 — the country's largest trading partners — 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.
What 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.
