Will President-Elect Donald Trump's Plan to Implement Tariffs Cause Stocks to Plunge? Here's What History Tells Us.

As President-Elect Donald Trump prepares to take office, investors are bracing for potential market volatility, particularly in response to his proposed tariff policies. Trump has vowed to increase tariffs on goods from China and other countries, raising concerns about the impact on global trade and stock markets. But what does history tell us about the relationship between tariffs and stock market performance? Let's delve into the past to gain insights into the potential effects of Trump's tariff plans.

The Smoot-Hawley Tariff Act of 1930 provides a historical precedent for the impact of tariffs on stock markets. This act raised average tariffs from 38% to 45%, affecting hundreds of categories and thousands of items. The immediate effect was a 17% drop in the Dow Jones Industrial Average over the following six months (Source: "The Smoot-Hawley Tariff: A Quantitative Analysis," by Douglas A. Irwin). However, the long-term effects were more nuanced. While the act contributed to a decline in international trade, it did not cause the Great Depression. Instead, it exacerbated the economic downturn by isolating the U.S. and reducing global trade (Source: "The Economic Aftermath of the Smoot-Hawley Tariff," by Douglas A. Irwin).



Retaliatory tariffs from other countries in response to Smoot-Hawley further exacerbated the situation. Between 1929 and 1932, U.S. exports to Canada and Europe dropped by 65% and 70%, respectively (Econlife, 2024). This reduction in trade contributed to the Great Depression, with U.S. GDP contracting by 12.9% in 1932 (Bureau of Economic Analysis). The stock market also suffered, with the Dow Jones Industrial Average plummeting by 89% from 1929 to 1932 (YCharts).

Historically, retaliatory tariffs have had a significant impact on the U.S. economy and stock market. In the 1930s, the Smoot-Hawley Act raised tariffs, leading to a cycle of reciprocal tariffs and isolating the U.S. (econlife.com). During the 2018-2019 Trump tariffs, prices increased, U.S. manufacturers produced less, and farmers suffered export losses (econlife.com). Recent research shows that targeted tariffs had only a brief effect on financial markets, with U.S. stocks falling on tariff announcement days (blogs.cfainstitute.org). However, tariffs also protected safe-haven assets like the 10-year U.S. Treasury and had no lasting effects on expected US stock market volatility (blogs.cfainstitute.org).

A second Trump administration's trade policies, characterized by potential tariffs and a hawkish stance towards China, could significantly impact global supply chains and U.S. multinational corporations. Historically, tariffs have led to retaliatory responses from U.S. trading partners, disrupting supply chains and increasing costs for companies reliant on global inputs. For instance, during the 2018-2019 trade conflicts, domestic-facing and defensive industries outperformed, while automobile, capital goods, and technology hardware stocks underperformed. U.S. multinationals with extensive global operations, like Apple and Microsoft, could face headwinds due to increased trade uncertainty and potential supply chain disruptions. However, companies with robust management and enduring business models, like Amazon and Apple, may be better positioned to navigate these challenges.

In conclusion, history suggests that tariffs can have a significant impact on stock markets, both in the short and long term. While the immediate effect of Trump's proposed tariffs on the stock market remains uncertain, investors should be prepared for potential volatility. Diversifying portfolios, focusing on domestic-facing and defensive industries, and investing in companies with strong balance sheets and robust management can help mitigate risks. As the new administration takes office, investors should closely monitor trade policy developments and adjust their strategies accordingly.