President Trump set off a fresh round of stock market volatility this week when he confirmed his plan to impose 25% tariffs on imports from neighbours Canada and Mexico – and increase tariffs on Chinese goods coming into the US as well.
This led to a sharp sell-off on Wall Street, and repercussions on global markets, as tit-for-tat retaliation ensued.
China has slapped 15% tariffs on some US agricultural products, while Canada has imposed duties on American goods, including wine, beer, bourbon and Florida orange juice.
There will be some hopes lingering that negotiations could limit a further escalation. But, Trump seems determined to punish them for various transgressions.
This article isn’t advice. All investments can rise and fall in value, so you could get back less than you invest. Past performance isn’t a guide to the future. If you’re not sure if an investment’s right for you, ask for financial advice.
Why is Trump imposing tariffs?
He’s accused Canada and Mexico of not doing enough to stop illegal immigration and US being partly to blame for the fentanyl drug epidemic. So far, talks haven’t done the trick of finding a solution, with Trump saying there was no room left for a deal, so finding a way out of this impasse does not look easy.
The big risk is that the trade war will escalate.
Canada has said it will place tariffs on another $86bn of US goods if Trump’s tariffs were still in place in 21 days – disrupting what Canada’s Prime minister Trudeau described as a highly successful trading relationship.
Despite concerns about the knock-on effect to growth, President Trump is claiming tariffs will redress trade imbalances, and boost US manufacturing.
He’s hoping that in turn, this will then force more companies to relocate plants and factories to the US.
What’s happened to the price of oil?
As well as stock markets, oil prices have also fallen back.
This is because of worries about the effect of tariffs on the global economy and expectations that demand for energy will be lower if growth slows.
Brent Crude, the benchmark fell back to trade around $71 a barrel – a three-month low.
What could tariffs mean for inflation?
Tariff talk has set off fresh concerns about inflation, which has already showed signs of being stubborn.
Prices in the shops are set to rise for millions of Americans and the US central bank – the Federal Reserve – has already warned of the risks of this as US importers look at ways of passing on the higher costs of goods.
However, tariffs could also affect costs for housebuilders too – given how reliant the sector is on Canadian lumber.
The price of cars is also expected to rise given the complex supply chains for US manufacturers stretching across Canada and Mexico.
If essential and goods rise in price, consumers will have less money to spend elsewhere in the economy, adding to US growth concerns, with consumer confidence, already falling.
Defence budgets in focus
Of course, it’s not just tariffs but fractious international relations which have been making headline news – particularly the shocking clash between Trump, Vance and Zelensky in the Oval office at the White House. This has brought the need for Europe to increase collective security into sharp focus.
A show of co-operation among leaders in London has reinforced expectations that military budgets will swell in a new era of collaboration to counter the Russian threat.
How has the FTSE 100 reacted?
The expectation of increased state spending on military capabilities has been helping to offset jitters about fraught geo-politics and US tariffs concerns.
The FTSE 100 raced to fresh highs on the first trading day of March, also helped by a manufacturing snapshot in China coming in better than expected.
However, with the tariff threats coming into force, it’s taking some shine off the index.
The FTSE 100’s defensive nature, given it’s also stuffed with dividend-paying stocks and consumer staples, is still likely to prove a draw for many investors wanting to stay diversified amid volatile markets.
What should investors do?
Stock market drops can be scary, even for experienced investors, but it’s important to remember that investing is a long-term pursuit.
These (very) short-term sell offs or spikes should be less scary in that context. The value of compounding can be huge and shouldn’t be underestimated, so don’t be put off by short-term noise.
Times like this can also be a good reminder to check in on your portfolio and make sure you’re still happy with how much risk you’re taking and it’s suitable for your needs.
If you’re looking for investments to help you invest during stock market uncertainty, here are three ISA fund ideas.
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