Trump tariffs and market volatility: what investors should know

Is that it?

After all the build-up, the resumption of higher US tariffs on imported goods and services on August 1 ended up being something of a damp squib.

Thanks to new trade deals agreed between the US and a host of countries and regions including the UK and the EU, the anticipated major fall-out – and consequential market turmoil – largely failed to happen.

But should all this really be a surprise – and what does it mean for investors?

Predicting the unpredictable

The one thing which has been predictable since Donald Trump took office at the start of this year has been his unpredictability.

As a result, there are now signs that markets are starting to get used to the somewhat quixotic nature of Trump’s actions and almost pricing in the volatility which they inevitably cause.

Looking back

Let’s look back to the start of April – ‘Liberation Day’ as Donald Trump called it – when the White House overnight imposed tariffs on goods and services from a vast swathe of countries.

It is fair to say that the decision caused chaos on the markets and leading indices around the world plunged into the red.

At Fairstone Investment Management, we got a lot of calls from advisers whose clients were worried about the value of their investments and how they could be affected by the global market volatility.

In the middle of the storm caused by the initial tariffs – and subsequent days when the US and China embarked on tit for tat tariff rises to three-figure percentages – it was difficult to maintain a steady course.

Yet within a space of a few days, those tariffs were placed on pause for 90 days and the markets calmed considerably.

US equities, which took a battering in the early part of April, recovered fairly swiftly afterwards and were back to all-time highs by the start of July. This suggests that investors see the fundamentals of the US economy as sound and are not anticipating a global slowdown in growth.

Even at the start of the week when the tariff pause was going to be lifted, there was relatively little volatility, suggesting that the markets were pretty sanguine about what was to come on August 1.

Looking now

While the more punitive Trump tariffs of 50%-plus threatened on some countries have not been carried through, some countries such as Canada (35%), Switzerland (39%) and Brazil (50%) are still threatened with higher rates by the Trump administration for various reasons.

There was a brief surge in the price of copper on world markets after Trump said the US is considering imposing 50% tariffs on the metal. Other than that, reaction on the markets has been relatively subdued. For example, the FTSE 100 ended August 1 close to record highs of 9,100-plus, compared with the 7,544 it sank to in the immediate wake of ‘Liberation Day’ back in April.

The idea that these delays could become a pattern of behaviour from the White House is starting to gain ground. The TACO acronym (Trump Always Chickens Out) is beginning to be quoted by traders in increasing numbers.

However, to quote a more English metaphor, it is by no means certain that the US President will continue to march his men up to the top of the hill only to march them down again.

Markets remain wary of the potential for tariffs to ramp up at short notice and the potential longer term impacts of Trump tariffs on the US economy and global trade. As a result, markets and investors will keep watching the situation closely.

Looking forward

As stated at the start of this article, trying to predict Donald Trump’s next move is almost impossible.

Even though the threat of punitive tariffs has largely disappeared, the effective tariff rate being imposed by the US on the rest of the world is running at around 18%. This compares with levels of between 2% and 4% for the past 40 years.

There are signs that the policy is starting to reshape global trade flows. And while Trump is in the White House, there is always the chance of sudden changes in direction.

What this means for investors

This whole episode is almost like an object lesson in the basic rules of investment:

Don’t try and time the market

If you had sold investments while the indexes were plummeting at the start of April only to buy them back when markets recovered, you could have lost a lot of capital. Attempting to time the sale and purchase of investments is extremely tricky, even for investment professionals, and unforeseen events can easily upset all your calculations.

Stick to your investment plan

Investing is a long-term pursuit and staying invested is more effective than trying to predict market highs and lows. Changing course too often may well mean you miss out on the benefits of recovery and even a few days out of the market can be costly.

Don’t put your eggs in one basket

Diversifying your investments can help to reduce risk. It also means that no single downturn – even if it’s temporary – can seriously impact the value of your portfolio.

Don’t listen too much to the noise

Keeping informed is important, but in the world of instant news alerts and social media froth, you can get caught up in spirals of fear or euphoria. This can lead you to make bad investment decisions. Keep an ear out but don’t let the news cycle dictate what you do.

Trust in the professionals

Investment managers and financial advisers have extensive experience of market swings, unforeseen events and all manner of economic shocks. Lean on that experience by taking professional financial and investment advice to ensure your plans are best placed to withstand the turbulence from Trump tariffs, trade wars or other events which could affect your financial future.

Key takeaways

Tariffs are an excellent example of the unpredictable external forces which can impact your investment plan.

Keeping calm, staying the course and sticking to your long-term strategy is a wise way to deal with such events.

Disclaimer: It is important to note that the value of investments and the income from them can go down as well as up and that you may get back less than the amount you invested. This article is for informational purposes only and does not constitute financial, tax, or legal advice. Tax treatment depends on individual circumstances and may change. Always seek professional advice before making financial decisions.