Trade headlines continue to weigh on markets as new tariffs go into effect. President Trump recently confirmed tariffs on Canada, Mexico, and China, dashing hopes of more extensions or last-minute deals. Additional tariffs are expected in the coming months, including reciprocal ones against countries that impose duties on U.S. goods. Investors worry that a trade war could raise prices for consumers and businesses, slowing economic growth. The stock market likes certainty, and now with this uncertain backdrop, the market has pulled back in recent days across major indices and sectors. 

 

Just as markets pulled back on trade war concerns in 2017 and 2018, investors have been on edge since the presidential inauguration. History shows that markets can overcome these concerns in the long run, even if the day-to-day swings are uncomfortable. Tariffs can be concerning because they represent taxes on imported goods that can then be passed on to buyers. With inflation rates still stickier than many would like, tariffs could add further pressure to the prices of everyday goods. This is made worse if other countries retaliate with their own tariffs, sparking an escalating trade war. 

 

 

              It’s important to keep this round of tariffs in perspective. First, the U.S. has a long history of using tariffs, dating back to the Industrial Revolution and hitting a peak during the Great Depression. The goal of tariffs is often to protect domestic industries, especially when they involve important or sensitive sectors, such as technology and national security. Second, the previous round of tariffs during President Trump’s first administration led to trade deals with Mexico, China, and others. For the administration, tariffs are often used as a negotiating tactic for other policy objectives, such as curbing unauthorized immigration or imports of illegal drugs. Lastly, market reactions to tariff announcements often prove more dramatic than their actual economic impact. This is especially true if tariffs are short-lived or if deals are reached. While markets were choppy from 2017 to 2019, when trade wars were a concern, markets generally performed quite well, with the S&P 500 gaining around 15.30% on an annualized total return basis. While today’s concerns are not the same as previous episodes, they are a reminder that market fears do not always translate into reality. 

 

 

The S&P 500 has lost around 6% since its high on February 19th. While this can be unpleasant, the reality is that market pullbacks of this magnitude occur regularly. Pullbacks of this size or worse occurred twice in 2024, three times in 2023, and a dozen times during the 2022 bear market. With markets reaching new all-time highs over the past few years, some investors may have grown accustomed to markets only moving in one direction. While the current year-to-date performance may not be what many hoped for at the beginning of the year, when much of the focus was on pro-growth policies, many aspects of the market remain positive. For example, corporate earnings grew at a strong pace this past earnings season. Unemployment is still historically low at 4.0%, wages are rising, and productivity growth remains steady. From a risk perspective, high-yield credit spreads remain well below pre-pandemic levels. This suggests bond investors are less nervous about growth prospects than the stock market. If we look at how the Bloomberg Barclays Aggregate Bond Index has performed in that same time frame as the S&P 500, it is up around 1.80%, which shows the importance of a diversified portfolio, as it can typically hedge volatility. 

 

 

To close, while many investors will focus on the S&P 500, other areas of the market have performed well and have outperformed the S&P so far this year. The International markets are up over 5.50%, value stocks are up 2%, and your more “defensive” sectors of the market, like healthcare, have done well, with it being up 7.70%. Bonds have benefited from interest rates falling, as they often do in difficult environments, positive bond returns, coupled with international stocks have helped to offset the declines we have seen. It is important to remember to maintain a long-term approach, as while short-term market swings can be unpleasant, history shows us that staying invested through the volatility has rewarded investors in the long run.