After a week of heightened anxiety over advancements in AI, market attention has shifted to global trade tensions. Over the weekend, the White House announced sweeping tariffs on some of the nation’s largest trading partners. How should investors react to what may be the first shots fired in a new trade war?

Let’s start with a little background on what has transpired over the last few days:

• Saturday’s announcement included a 25% tariff on most imports from Canada and Mexico, as well as an additional 10% on China, with the aim to curb illegal migration and fentanyl imports.
• By Monday, a one-month delay was negotiated for Mexico and Canada after both nations agreed to strengthen their border security.
• On Tuesday morning, the tariff on China went into effect. In response, China announced a 15% tariff on select U.S. imports, an antitrust probe on Google, and restrictions on the export of key minerals.

The market has generally been optimistic about the incoming administration’s policy agenda. The prospect of lower taxes and deregulation, in particular, has been viewed favorably. However, President Trump’s views on trade and his affinity for tariffs have made many people nervous. This is understandable as the vast majority of economists suggest the use of tariffs leads to higher prices and less overall trade. Such an outcome is a net negative for all involved. The market appears to agree with the economists, as the tariff announcement put obvious pressure on stock prices. 

What Does This Mean for Investors?

It’s important for investors to remember that we have been through this before. Trade War 1.0, which occurred during President Trump’s first term, created volatility in the market and anxiety for investors. While it dominated the headlines for months, it proved to be just another episode in a long series of market dips and rallies. History shows there was little lasting impact on investor portfolios.

The market hates uncertainty, and the forthcoming trade negotiations have the potential to create a lot of it. One of the best things an investor can do is manage their own expectations. Perhaps Trade War 2.0 resolves itself quickly and with little market disruption. While that would obviously be the preferred outcome, it might not happen that way. Resolve yourself now to be ok with the alternative. Businesses will adapt regardless of the outcome, just as they have countless times throughout history.   

The story is developing rapidly, as is evident by the abruptness of the weekend tariff announcement and the subsequent reversal on Monday. It’s quite possible the story could change several more times between the time of this writing (Tuesday) and when the Market Update gets published (Wednesday). Investors would do well not to get hung up on every twist and turn the story takes or put too much faith in what the market pundits are forecasting. Ultimately, nobody has a clue how any of this is going to play out.  

Market fluctuations can be unsettling, but history shows that patience and discipline are essential to successful investing. Volatility may be uncomfortable, but it's also the reason investors earn higher returns compared to risk-free alternatives like cash. By enduring short-term market swings, long-term investors have consistently been rewarded for staying the course.

Source: MarketWatch

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