How do tariffs affect the stock market?

Investors may be experiencing déjà vu as tariffs make headlines. The first Trump administration’s tariffs on China sparked a trade war that whipsawed markets and dominated the news, much like now.

How did markets respond? Volatility rose in 2018, driven by the trade war and a slowdown in China’s economy, causing the S&P 500 Index to fall 4.4%. But the index recovered sharply in 2019, up 31.1%, as trade deals were announced, and consumer spending remained steady. In both years, inflation was muted in the aggregate, with the annual consumer price index ranging from 1.50% to 2.85% in 2018 and 2019.

The world has changed since that initial round of tariffs. The impact of the pandemic, wars in Ukraine and the Middle East, and the greatest inflation shock in decades continues to ripple through the economy. How tariffs and federal spending cuts will affect growth is even more uncertain given the evolving nature of Trump’s policies.

The lesson may be that in times like these, it’s important to be clear about what we do and don’t know — recognizing that tariffs are just one part of the equation. Ultimately, the U.S. stock market has proven to be remarkably resilient over time. Focusing on investment principles such as diversification and staying invested in the face of market volatility become more essential to achieving long-term investment goals. Read more on tariffs from the Capital Group.

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