Markets have experienced renewed volatility as President Trump implements additional tariffs affecting Canada, Mexico, and China. These trade actions have eliminated earlier optimism about potential agreements or delays. Further tariff measures are anticipated, including retaliatory actions from countries facing U.S. duties.

The prospect of escalating trade tensions has sparked market concerns about potential economic impacts, including higher costs for businesses and consumers. These worries have triggered recent declines across market segments.

Understanding the market impact of trade policy

Diversified portfolios and thoughtful financial planning demonstrate their value during periods of market uncertainty. Similar to previous trade-related market reactions in 2017 and 2018, investor anxiety has increased following the presidential inauguration. However, historical patterns suggest markets can ultimately overcome such challenges despite near-term fluctuations.

The primary market concern surrounding tariffs stems from their nature as import taxes that may increase consumer prices. In the current environment of elevated inflation, additional tariffs could further pressure prices of essential goods. The situation could intensify if trading partners implement reciprocal tariffs, as illustrated by the substantial U.S. trade deficits shown in the chart.

Context is crucial when evaluating current trade measures. The United States has frequently employed tariffs throughout its history, particularly during industrialization and the Great Depression era. These measures often aim to safeguard domestic industries, especially in strategic sectors like technology and defense.

Historical precedent from President Trump’s first term shows how tariffs led to new trade agreements with Mexico, China, and other partners. The administration often employs tariffs strategically to advance broader policy objectives, including immigration control and drug enforcement.

Initial market responses to trade announcements typically exceed their eventual economic effects, particularly when tariffs are temporary, or negotiations succeed. Despite trade-related market volatility from 2017 to 2019, overall market performance remained strong.

While current trade tensions have unique characteristics, they demonstrate how market fears don’t necessarily translate into lasting negative outcomes.

Market corrections are an expected part of the investment cycle

Stocks recent declines, while notable, represents a relatively common market occurrence. Similar or larger pullbacks happened twice in 2024, three times in 2023, and multiple times during 2022’s bear market.

Recent years of consistent market gains may have created unrealistic expectations among investors. Though year-to-date performance has disappointed some who anticipated pro-growth policy benefits, numerous positive economic indicators persist.

Recent corporate earnings showed robust growth, unemployment remains low at 4.0%, wages continue rising, and productivity growth is stable. High-yield bond spreads below pre-pandemic levels suggest fixed-income investors maintain optimism about economic prospects.

Long-term investment success requires maintaining perspective

Despite technology sector challenges, other market segments have shown resilience. Various asset classes and global regions have performed well, highlighting diversification benefits. Bond performance has improved as rates declined, helping offset equity market weakness in balanced portfolios.

Historical evidence supports maintaining a long-term investment approach during market volatility. While short-term fluctuations can be challenging, consistent market participation has historically rewarded patient investors through compounding returns.

Although trade headlines will likely continue generating market reactions, successful investing requires focusing beyond short-term events. Building and maintaining a well-designed portfolio serves long-term financial objectives measured in years and decades.

The bottom line? Recent trade policy developments have created market uncertainty and declines. However, maintaining a long-term investment strategy, rather than reacting to short-term volatility, typically leads to better financial outcomes. Please reach out to your CWA wealth advisor if you want to discuss your specific situation in more detail.

For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information is based upon third party data which may become outdated or otherwise superseded without notice. Third party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Data and analytics provided by Clearnomics, Inc. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, determined the accuracy, or confirmed the adequacy of this article.