Tariffs and the Stock Market: What You Need to Know Now!

Ladies and Gentlemen, BUCKLE UP! We are in the midst of a trade war that is shaking the foundations of the stock market. Tariffs are here, and they are affecting your portfolio. Let’s dive in and understand what tariffs are, why they are affecting the stock market, and what you need to do to protect your investments.

What Are Tariffs?

Tariffs are taxes imposed by one country on goods imported from another country. They are trade barriers that raise prices, reduce available quantities of goods and services for US businesses and consumers, and create an economic burden on foreign exporters. In simple terms, tariffs are like a consumption tax on American consumers and firms. The federal government collects revenue from a tax on purchases of imported goods, which means the prices consumers and firms pay will go up, leading to an increase in inflation in the near term.

Why Are Tariffs Affecting the Stock Market?

The recent tariff announcements by President Trump have sent shockwaves through the stock market. The April 2nd tariff announcement alone constitutes an increase in the average effective tariff rate of 11 ½ percentage points, implying a rise in consumer prices of roughly 1.3% in the short-run. This is equivalent to a loss of purchasing power of $2,100 per household on average in 2024 dollars. When considering all 2025 tariffs, the average effective tariff rate increases by just under 20 percentage points, raising consumer prices by 2.3% all told in the short-run, a loss of purchasing power of $3,800 per household on average in 2024 dollars.

The Long-Term Effects on Consumer Spending and Inflation

The long-term effects on consumer spending and inflation are significant. The analysis shows that US real GDP growth is -0.5pp lower in 2025 from the April 2nd announcement and -0.9pp lower from all 2025 tariffs. In the long-run, the US economy is persistently -0.4 and -0.6% smaller respectively, the equivalent of $100 billion and $180 billion annually in 2024 dollars. This reduction in GDP growth indicates a decrease in overall economic activity, which can lead to lower consumer spending as households have less disposable income. Additionally, the increase in prices due to tariffs can contribute to higher inflation, further eroding purchasing power and potentially leading to a cycle of reduced spending and economic slowdown.

Implications for Companies That Rely on Imported Materials or Export Their Products

The implications of tariffs on the profitability and stock prices of companies that rely heavily on imported materials or export their products are significant and multifaceted. Tariffs act like a consumption tax on American consumers and firms, meaning the federal government collects revenue from a tax on purchases of imported goods. As a result, the prices consumers and firms pay will go up, leading to an increase in inflation in the near term. This increase in prices will directly affect the profitability of companies that rely on imported materials, as their costs of production will rise. For example, the Budget Lab modeled the effect of the April 2nd tariff announcement and found that the price level from all 2025 tariffs rises by 2.3% in the short-run, which is equivalent to an average per household consumer loss of $3,800 in 2024 dollars. This increase in costs will likely be passed on to consumers, leading to a decrease in demand for their products and a subsequent decrease in profitability.

What to Do Now?

1. Diversify Your Portfolio: Don’t put all your eggs in one basket. Spread your investments across different sectors and geographies to mitigate the impact of tariffs.
2. Stay Informed: Keep an eye on the latest developments in trade policy. The market hates uncertainty, and staying informed can help you make better investment decisions.
3. Invest in Domestic Companies: Companies that rely less on imported materials and have a strong domestic market presence are likely to be less affected by tariffs.
4. Consider Defensive Stocks: Defensive stocks, such as those in the healthcare and consumer staples sectors, tend to perform well during times of economic uncertainty.

Conclusion

Tariffs are here to stay, and they are affecting the stock market in a big way. The recent tariff announcements have sent shockwaves through the market, and the long-term effects on consumer spending and inflation are significant. Companies that rely heavily on imported materials or export their products are particularly vulnerable. But don’t panic! By diversifying your portfolio, staying informed, investing in domestic companies, and considering defensive stocks, you can protect your investments and navigate these turbulent times. So, buckle up and get ready to ride out the storm!