What Trump’s tariffs could mean for the stock market

Summary

• ‍It’s probably less about the tariffs themselves, and more about the market turbulence they trigger. Markets often react strongly to uncertainty surrounding policy decisions rather than the actual policies once they’re implemented.
• Certain markets and stocks might benefit from tariffs, but they could also suffer. It’s worth exploring stocks that have proven resilient during previous bouts of volatility.
• Diversified portfolios remain your best defence against tariff-induced market disruptions. A global, multi-sector approach can help cushion shocks to your stocks.

Trump’s tariff talk

Within a matter of days, President-elect Donald Trump will be back in the White House. But he’s already made plenty of controversial declarations before setting foot through the door.

At a recent Mar-a-Lago conference, Trump pledged to “impose new tariffs so that the products in our stores will once again be stamped with those beautiful words, ‘Made in the USA.’” 

Among his sweeping proposals are steep tariffs on Mexican and Canadian goods, punitive measures against Denmark if it refuses to hand over Greenland, and a massive 60% tariff on Chinese imports. 

While these ideas may seem dramatic, they certainly align with Trump’s “America First” agenda, which shaped his first term in office. But tariffs are nothing new. They have long been a political lever for both Republican and Democratic leaders. President Biden actually extended many of Trump’s first-term tariffs and even implemented new ones.

Now, the question for investors is whether Trump’s latest proposals will actually disrupt global markets in a meaningful way — or if they’re just another peak on the rollercoaster of political volatility.

Volatility is your biggest threat

Attempting to predict or prepare for potential tariffs is a losing battle. It’s impossible to know for certain whether Trump’s claims should be taken as truths, or if they’re simply tools he’s using at the bargaining table. 

That’s why it’s worth considering that the immediate impact to your portfolio could lie less in Trump’s actual policies and more in the market volatility fueled by uncertainty. Stock markets thrive on stability and clarity. The mere speculation around sweeping tariffs can provoke sharp, reactive swings long before any policies are implemented.

For instance, former president George W. Bush enacted steel tariffs which drove steel prices up by 90%. US manufacturers suffered, big time, and the economy shed 476,000 jobs within a year. But within a year, the market regained its losses and the job market recovered too.

For investors, the lesson here is that it pays to avoid impulsive moves driven by speculation. A long-term investing mindset is the best way to avoid falling victim to the market’s inevitable ebbs and flows. A well-diversified portfolio, one that reaches across geographies and sectors, remains the best hedge against short-term volatility and long-term uncertainty.

What are stock market opportunities from Trump’s tariffs?

While it may seem obvious, on the surface, that Trump’s tariffs would benefit local manufacturers, that isn’t necessarily the case (as evidenced by the Bush administration tariff flop). On the flip side, even countries that have tariffs imposed upon them could see pockets of opportunity. This would be particularly true for businesses that can capitalise on changes in global trade, or those that can take advantage of currency swings.

Is now a good time to invest in Canada?

Take Canada, for instance. Two-thirds of all Canadian trade takes place with America. Meaning, Canadian firms heavily rely on exports to the country. But if all of this uncertainty around tariffs continues to drive down the already-weak Canadian dollar, Canadian goods will become cheaper for US buyers. This price advantage could actually, in theory, increase demand for Canadian exports – thus benefitting Canadian manufacturers.

What are tariff implications for UK investors?

To be clear, the above example is to highlight that there are a plethora of uncertainties regarding the impact of Trump’s potential policies. So, buying or selling investments based on your predictions of currency fluctuations is a highly risky strategy. You’re better off sticking to companies with evidence of continual profitability, the ability to meet a business need, and risk mitigation strategies in place should tariffs be implemented.

5. Look for a competitive advantage

To ensure long-term growth, Buffett focuses on companies with a competitive advantage that helps them outperform rivals. He famously described this as a competitive “moat” that protects a business’s profits.

"What we're trying to do," he explained, "is we're trying to find a business with a wide and long-lasting moat around it … protecting a terrific economic castle with an honest lord in charge of the castle."

To become King or Queen of the investing castle, you need to search out companies with a durable competitive advantage that will help them continue to build profits in the future.

What would tariffs mean for the stock market, overall?

According to the New York Fed, new tariff announcements tend to coincide with falling stock markets, rising 10-year treasury prices, and heightened expectations for volatility. But what’s the impact in the long run? Research from the CFA Institute found that in the grand scheme of things, tariff announcements have a fleeting and brief impact on volatility. 

The CFA Institute also determined that Trump’s Tariffs from 2018 and 2019 had only short lived impacts on the market. Under his first presidency, the US market experienced strong gains despite significant trade disputes with China, Mexico, and others. This growth was largely fueled by a period of strong corporate earnings, and tax cuts that were offsetting some impacts of trade tensions.

7. Build in a margin of safety

When picking stocks, Buffett aims to build in a “margin of safety” to provide a buffer against mistakes and underperformance.

“We look for three things when we buy stocks: a business we understand, management with integrity we trust, and a price that gives us a significant margin of safety,” he explains.

Buffett seeks out companies where his analysis reveals the intrinsic value is higher than the stock price, with some room to spare. This gives some wriggle room as a buffer against stock market declines or overly optimistic projections, protecting investors from potential losses.

"A too-high purchase price for the stock of an excellent company can undo the effects of a subsequent decade of favourable business developments," he warns.

How to Trump-proof your portfolio

You don’t need to overhaul your investment strategy every time a tariff headline appears. But there are practical steps you can take to add resilience to your portfolio:‍

1. ‍Stick to diversification: A portfolio spread across industries and geographies is naturally more resilient to localised shocks. For UK investors, this could mean balancing exposure to UK, US, EU, and emerging markets.‍
2. Focus on the long-term fundamentals: Avoid reactive trading based on short-term market jitters. Companies with strong balance sheets and sustainable competitive advantages are better equipped to weather tariff-related disruptions.
3. Invest in resilient sectors: Certain sectors tend to exhibit resilience during economic or geopolitical volatility. Gold, in particular, has a longstanding reputation as a safe-haven asset during times of financial uncertainty. The price of gold increased when markets tumbled during the 2008 financial crisis, and it also shot up at the pandemic’s onset.

What action should you take?

While the headlines can be alarming, it’s important to keep perspective. Trump’s tariffs may well serve as a bargaining chip rather than an endgame. Many economists speculate they’ve been designed to force concessions during trade negotiations, meaning their actual implementation could be more moderate in the end. 

The market’s overall resilience during Trump’s first term in office also suggests that investors who stay disciplined for the long-run could achieve better returns than those trying to guess which stocks will and won’t benefit from Trump’s upcoming presidency. A well-thought-out investment strategy, rather than knee-jerk reactions, is the key to navigating the noise.

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