Trump's new tariffs have sent shock waves through the economy, and stock market reactions have been strong. The S&P 500, an important indicator of U.S. stock performance, has dropped 11% in value since the announcement, erasing $5 trillion in value. Many investors are concerned that these trade policies could trigger a global recession.
What brought about this development?
On April 2, Trump announced a series of sweeping new tariffs. Beginning April 5, most imported goods will incur a 10% tax, and, starting April 9, even heavier taxes will be paid on imports from dozens of countries. These “reciprocal tariffs” seek to protect American industries by leveling the playing field. However, they also serve to make other goods costlier for American businesses and consumers, thereby hurting their economy. Fitch Ratings noted that the average tax on U.S. imports right now is at its highest level since around 1910.
What do historical references tell?
Historically, there have been a few examples of even minor increases in tariffs producing large decreases in stock prices. Between 1955 and 1962, a small increase in tariffs accompanied four corrections and two bear markets. Once again, this in the early 1980s saw another increase, producing a 27% drop in the markets. The last round of tariffs, between 2017 and 2019, was also responsible for two corrections, and one of those was almost a 20% drop in the S&P 500. The latest hike, a 19-percentage-point jump in average import taxes, is much larger than in those earlier cases, raising the risk of even deeper market declines.
Here is something that cheers us up.
There has always been pain thanks to tariffs in the past, but it has always been proved that over a short period of time the stock market rises. So for every downturn related to trade tensions, history shows that such downswings turn out to be buying opportunities. Financial strategist David Kelly puts forth that tariffs can hurt growth and create instability worldwide, but the U.S. market has always proven resilient in the long run. Warren Buffett's famous rule of thumb is “be fearful when others are greedy, and be greedy when others are fearful.” This advice is still followed by many long-term investors today.
What should you do now?
The best thing now is to maintain calmness. Panic selling often leads to regrets when the rebound happens in the market. Continuous investment and conviction for long-term, solid companies make eventual price declines show up as positives. This could mean great buying opportunities on the best stocks at discount prices for those who have a long horizon.
