The combination of economic and strategic goals behind President Trump’s global tariffs has produced immediate reactions from investors worldwide.
Why has the US imposed Tariffs?
Some investors have been asking why the US administration has imposed Tariffs. Here are a few possible reasons.
1. The Trump administration uses tariffs to shield domestic industries through price increases for imported goods. The “America First” policy has always been his priority because it fights trade deficits while promoting American manufacturing.
2. The Trump administration uses tariffs as diplomatic instruments to make trading partners reduce their trade restrictions and negotiate better trade deals.
3. Analysts believe that tariffs represent a strategic move to decrease the value of the U.S. dollar, which would decrease export costs while lowering the worth of Chinese currency reserves and other foreign-held U.S. currencies.
Although most of the Tariffs have been postponed for 90 days, the US still want to address the issue of a trade deficit with China.
Market Reaction to the Current Issue of Tariffs
Short-term market responses from investors emerged due to these new tariffs.
Implementing these tariffs has led to significant disturbances throughout worldwide financial markets.
1. The stock market dropped significantly because investors worry that tariffs will slow economic growth, raise prices, and decrease business earnings. The S&P 500 endured its most significant two-day downturn since the start of the COVID-19 pandemic.
2. The unclear duration and extent of these tariffs create higher market volatility among investors. Major trading partners, including China, Canada, and the EU, create economic risks because investors worry about possible retaliatory actions.
3. Market instability has triggered investors to direct their money toward safe assets such as gold, long-term U.S. Treasury bonds, and defensive sectors, including healthcare and real estate.
How should investors react
Trump’s implementation of global tariffs represents a dangerous bid to restructure trade relationships between nations, yet such actions create substantial potential threats. The short-term market response remains negative because economic slowdown concerns and uncertainty about the future dominate investor sentiment. Analysts predict beneficial trade agreements or decreased trade barriers could stabilise markets and deliver economic gains to the United States despite short-term market instability.
Even though the current problems will concern many investors, market setbacks are part of the long-term investment process. The graph below shows Bull market runs (when markets increase in value) against the bear market (when markets drop). Over a century of market data shows us one simple truth: the declines are temporary; the advance is permanent.
A similar pattern holds true for the US market. Morningstar’s analysis of 19 bear markets in the US over the past 150 years arrived at the same conclusion: Though market declines vary in length and severity, they always recover and reach new highs.
This chart captures more than 50 years of major economic and geopolitical crises—from the Watergate scandal and the 1976 Sterling crisis to the Cold War, the fall of the Berlin Wall, Black Monday, Black Wednesday, the Dotcom Bubble, the European Sovereign Debt Crisis, the Global Financial Crisis, and COVID, to name but a few.
Yet, £1,000 invested in 19702 in a basket of global equities would be worth a staggering £263,000 as of December 2024.
Conclusion
As per previous setbacks, investors should ride out the current investment storm and avoid making rash decisions. The issues with Trump’s Tariffs will eventually pass, and at this point, we would expect markets to normalise.