As you’ve likely read, this week President Trump imposed a 25% tariff on Canada and Mexico and an additional 10% tariff on China, on top of the 10% tariff imposed on Chinese goods in February.
Here’s a sampling of headlines since Monday, March 3, regarding their impact on the markets:
- “Nasdaq Slides as Investors Brace for Mexico, Canada Tariffs” – Wall Street Journal
- “Markets Fall After New U.S. Tariffs Prompt Retaliations” – New York Times
- “Stocks Extend Tumble as Trump’s Tariffs Spark Retaliation” – Wall Street Journal
- “Market Slide Reflects Tariff Fears Rippling Through Economy” – Wall Street Journal
As regular Life with Money readers know, Park Piedmont is almost always skeptical of the media’s efforts to overstate market moves, and to attribute single causes to market changes that are driven by many factors.
For example, there have been a number of other policy changes this week, including pausing military aid to Ukraine and threats to cut federal funding to universities that allow “illegal protests.”
However, headlines aside, we do feel it is worth having a basic understanding of tariffs, some of their effects on consumers, and their potential impacts on financial markets.
What are tariffs?
Tariffs are a tax, mostly on goods, that are imported from another country.
If the U.S. puts a 20% tariff on steel coming into the U.S. from China, it is making that steel more expensive. The intended impact is to raise the price of imported steel in the U.S., thereby reducing American demand for this steel and making steel manufactured in the U.S. more competitively priced.
At first glance, it is clear that the U.S. manufacturer of steel is benefitted, and the Chinese manufacturer is hurt. But the higher price for steel should also likely increase prices for U.S. goods made with that steel, so other businesses in the supply chain and/or the end consumer in the U.S. is likely to pay more for the goods made from steel.
Who pays for tariffs?
A recent article from The Wall Street Journal breaks down the potential impact of tariffs on individuals:
“How much more will consumers pay? The question is surprisingly hard to answer. For example, a 10% tariff on shoes from China would raise their sticker price 4% or so, but on wine or olive oil from Italy, almost 10%.
“Why the difference? Tariffs aren’t the only factor at work. Currency changes, the availability of alternatives, and the pricing strategies of producers and importers all play a part. All of this affects ‘pass-through’ – how much of a tariff reaches the consumer.”
As the article notes: “Tariffs are most keenly felt when imported or domestic alternatives are unavailable, or the affected product commands a significant premium. Even if tariffs raise the price of the latest iPhone, Apple fans would probably still buy it.”
Here’s another example of when a consumer might feel the impact of tariffs:
“Mexico is the top foreign supplier of passenger cars and sport-utility vehicles into the U.S., accounting for 23% of imports in 2024. Tariffs on Mexican-made cars would likely mean not just higher prices for vehicles shipped across the border, but on all cars as other manufacturers and dealers see a chance to eke out more profit while gaining market share.”
What do the new tariffs mean for your portfolio?
As mentioned above, it’s difficult if not impossible to assign a single cause to market changes, either up or down. But the threat of tariffs last week, and their imposition this week, appear to be major factors in the recent stock market declines. These have erased much of the gains made since the election in November.
As reported in The New York Times on Tuesday, “The S&P 500 fell over 1 percent, adding to Monday’s 1.8 percent loss, which was its sharpest decline this year. The Nasdaq Composite index dropped roughly 1 percent, putting it briefly in what is known as a correction — a drop of 10 percent or more from its recent peak.”
Interest rates have also declined significantly in recent weeks, with prices increasing (rates and bond prices move in opposite directions). These changes likely reflect a “flight to safety,” as demand for relatively less risky bonds increases as stock prices decline.
Should you take any action steps based on market declines?
At Park Piedmont, we view the tariff issue as one of many factors that affect the economy and the financial markets, with highly uncertain impacts going forward. We do not know what will happen in the future, nor do we ever attempt to guess, but we do know that focusing on the long-term is the surest way to stay the course.
As always, unless your life circumstances have recently changed (separate from the change in presidential administrations), we suggest maintaining your previously established asset allocation, even when volatility can make it tempting to reconsider the thoughtful decisions you made during less stressful times.
Attempting to “time” the markets (i.e., being “in” when prices are rising and “out” when they’re declining) is typically a losing game, since you have to be right twice: once in selling before the large part of the downturn, and again in buying back into the markets so you don’t miss a potential recovery.
The other practical issue when considering major changes in your asset allocation is capital gains taxes. Stocks and stock funds are typically held in “taxable” individual, Joint, and Trust accounts (as opposed to “tax-deferred” retirement accounts). Depending on how long you’ve owned these positions, you might have significant gains. This is generally favorable, but can generate a significant tax bill if you make sales.
Please don’t hesitate to reach out to your advisor for further discussion, especially during this chaotic, confusing period. We’re always here to help.