Following the election, optimism surged amid the belief that the new President would follow through with plans to pare back regulations that stifle businesses and extend the tax cuts passed in 2017.
From an investor’s perspective, so far, so good.
But candidate Donald Trump also pledged that he would enact tariffs on countries he believed were not playing fairly with U.S. manufacturers and U.S. exporters.
The 47th President has been in office for just over one month, and he’s wasted little time on the tariff front.
But why are tariffs important to investors? A better question is: Why do investors fear tariffs?
Sweeping tariffs have the potential to affect the broader U.S. economy.
- First, tariffs are a tax, and tariffs on imported goods will raise prices at home if the importer or retailer doesn’t absorb the new tax. The significant increase in levies on Canadian, Mexican, and Chinese goods strongly suggests they cannot be fully absorbed, which would lead to higher prices. According to the U.S. Census, these three nations are the top providers of goods imported into the United States ($1.4 trillion last year).
- Next, barriers erected by the U.S. will likely be met by higher barriers for U.S. exporters as countries retaliate. That may restrain production among U.S. manufacturers.
- Tit for tat: Investors are also worried that countermeasures could lead to a rapid escalation of any trade war.
- Finally, tariffs introduce uncertainty into the economic narrative, which may undermine business and consumer confidence. In turn, businesses may reduce spending until the dust settles.
Meanwhile, various economic reports suggest that U.S. economic growth may be slowing down. However, we also recognize that economic data can fluctuate from month to month, and one month does not establish a trend.
It’s possible that the recent slowdown in economic activity is related to the weather, as some parts of the nation have experienced severe cold.
Nonetheless, we have seen a rotation out of riskier segments of the market and into more defensive issues. Although the major U.S. indexes fell last month, the Dow, which has underperformed in the past two years, is emerging as a frontrunner as we begin 2025.
Additionally, bonds have been a beneficiary of market uncertainty.
| Table 3: Key Index Returns | ||
| Index | MTD % | YTD % |
| Dow Jones Industrial Average | -1.6 | 3.1 |
| NASDAQ Composite | -4.0 | -2.4 |
| S&P 500 Index | -1.4 | 1.2 |
| Russell 2000 Index | -5.4 | -3.0 |
| MSCI World ex-U.S.A.** | 1.6 | 6.6 |
| MSCI Emerging Markets** | 0.4 | 2.0 |
| Bloomberg U.S. Agg Total Return | 2.2 | 2.7 |
Source: The Wall Street Journal, MSCI.com, Bloomberg, MarketWatch
MTD returns: January 31, 2025–February 28, 2025
YTD returns: December 31, 2024–February 28, 2025
**in US dollars
Final thoughts
There are few indications today that the economy is poised to roll over.
S&P 500 profits were strong in the fourth quarter and are on pace to rise 17%, according to LSEG. Earnings growth and stable interest rates have clearly underpinned equities.
But we are mindful that market pullbacks cannot be discounted, even during an economic expansion.
We have had discussions with you that have enabled us to design a roadmap to achieve your financial goals. This roadmap allows for increased objectivity and helps remove emotional biases that can sometimes infiltrate the decision-making process.
A diversified portfolio cannot completely shelter you from market pullback, but it helps reduce volatility while tapping into the wealth-creating potential that stocks have offered over the long term.
I trust you have found this review to be informative. If you have any inquiries or wish to discuss any other matters, please don’t hesitate to contact me or any team member.
Thank you for choosing us as your financial advisor. We are honored and humbled by your trust.
