Trump's Tariffs and Stock Market Turbulence: What Should Investors Do?
A long-term perspective trumps short-term stock market volatility.
The stock market is once again experiencing significant volatility as President Trump's administration began implementing its tariff program.
Over the past couple of weeks, US President Trump has implemented new trade barriers, including 25% tariffs on goods from Mexico and Canada and a 20% duty on imports from China.
The US has also introduced a 25% tariff on all steel and aluminium imports from around the world.
In recent statements, Trump warned he would impose a 200% tariff on European alcoholic beverages including wine, Champagne, and spirits if the European Union proceeds with its intended 50% duty on American whiskey.
Lessons from History
The current market reaction bears striking resemblance to events during President Trump's first term, particularly between 2018 and 2019, when his administration engaged in a prolonged trade dispute with China. During that period, markets experienced similar patterns of volatility and uncertainty.
Looking back at news coverage from Trump's first term provides valuable context for today's market situation.
CNBC, 22 March 2018: “Dow drops more than 700 points on trade fears, posts worst day since Feb. 8”
CNBC, 13 May 2019: “$1.1 trillion in stock market value lost so far from trade war sell-off with more expected”
New York Times, 26 August 2019: “S&P, Dow and Nasdaq Slide After China Tariff Threat and Trump Twitter Response”
The parallels to today's headlines are unmistakable, suggesting that markets are reacting to a familiar pattern of trade tension and economic uncertainty.
The Stock Market Climbs A Wall of Worry
Amid growing concerns about the market impact of President Trump's renewed tariff agenda, let’s look at things from a rational point of view.
Data from Dimensional Fund Advisors illustrates how markets navigated the previous round of trade tensions:
The above chart tracks the growth of a hypothetical $1 investment from January 2017 through December 2020, spanning President Trump's first term.
Despite significant trade policy disruptions, markets posted positive returns as follows:
The MSCI China Index doubled to $2.00
The S&P 500 grew to $1.81
Developed markets excluding the US reached $1.41
While markets visibly reacted to tariff announcements during President Trump's first term, the data highlights an important reality.
Investors who stayed focused on the long term ultimately experienced positive returns in all major markets by December 2020, despite the ongoing trade tensions that made headlines.
Let’s Look Beyond the Headlines
Warren Buffett, widely regarded as one of the greatest investors of all time, has consistently emphasised the importance of patience in investing, especially during periods of market volatility. Here is one of his most relevant quotes for today's tariff-induced market environment:
"The stock market is a device for transferring money from the impatient to the patient."
This simple, yet profound observation encapsulates the essence of successful long-term investing during market turbulence.
While the impact of tariffs on stock prices may cause short-term anxiety, it’s crucial to remain focused on your long-term financial goals.
Stay disciplined, stick to your investment strategy, and remember that volatility is part of the market's natural ebb and flow.
By keeping a long-term perspective, investors can weather the storm of tariffs, just as they have in previous trade disputes. It’s a simple strategy that trumps in the end.
Thank you Felix for reading and your support!
Good analysis!