Since his 2024 campaign, President-elect Donald Trump has promised far-reaching tariffs on many countries. Once Trump is formally inaugurated on Jan. 20, he can make that promise a reality through executive orders or the Republican-controlled Congress.
A tariff is a tax on imports. Trump plans to use them to reduce the U.S. trade deficit and as a bargaining chip to get foreign countries to enact policies in line with his agenda regarding immigration and the border.
Needless to say, investors are closely watching developments on tariffs, which had a big impact on the stock market during Trump's first term. Here's what happened to the stock market during the 11 days when tariffs were announced in 2018 and 2019.
Tariffs can move the market in a big way
The market closely follows politics, but political news and events that move markets significantly are few and far between. Executive orders and new laws don't always move the needle, but tariff announcements during Trump's first term certainly did.
Investors care about tariffs for many reasons. Tariffs can benefit domestic companies by making their products more competitive and by encouraging consumers to buy American. However, tariffs can also have the unintended effect of increasing the cost of producing goods, which impacts the economics of many publicly-traded companies. Higher prices can have a ripple effect on the economy because if companies have to pay more, they will typically look to pass those extra costs to consumers, which can spark inflation. Nobody wants to see inflation reignite after what happened over the past few years. Countries may also retaliate with their own tariff policies, which can also wreak havoc in the market.
Generally speaking, investors reacted negatively to tariff announcements during Trump's first administration. Between Jan. 2018 and Aug. 2019, a trade war broke out between the U.S. and China. Both countries made major tariff-related announcements on 11 different days, and here's what happened to the stock market on each day, according to a paper from the National Bureau of Economic Research:
| Date | Order | Market Performance |
|---|---|---|
| 01-23-2018 | U.S. imposes tariffs on solar panels and washing machines. | 0.3% |
| 03-01-2018 | U.S. imposes tariffs on steel and aluminum. | (1.1%) |
| 03-22-2018 | U.S. imposes $60B in annual tariffs on China. | (2.4%) |
| 03-23-2018 | China imposes tariffs on 128 U.S. exports. | (1.9%) |
| 06-15-2018 | China imposes $50B in tariffs on U.S. goods. | (0.2%) |
| 06-19-2018 | U.S. imposes tariffs on $200B of Chinese goods. | (0.4%) |
| 08-02-2018 | China imposes $60B in tariffs on U.S. goods. | 0.5% |
| 05-06-2019 | U.S. increases tariffs by 25% on $200B of Chinese goods. | (0.4%) |
| 05-13-2019 | China increases tariffs on $60B of U.S. goods. | (2.5%) |
| 08-01-2019 | U.S. imposes 10% tariff on additional $300B of Chinese goods. | (0.9%) |
| 08-23-2019 | China imposes higher tariffs on soy and automobiles. | (2.5%) |
Data source: National Bureau of Economic Research. Market performance represented by value-weighted market portfolio from the Center for Research in Security Prices.
As you can see, the study's proxy for the market showed stocks falling consistently on days when the U.S. or China announced they were imposing tariffs.
Will history repeat itself?
While Trump is poised to impose more tariffs, the market is likely better prepared for them now than it was during his first administration. One cause for concern is that Trump has suggested tariffs on China could be as high as 60%. China's economy has struggled immensely in the wake of the pandemic, so the country's response could be particularly severe. China also has the second-largest economy in the world, meaning a further slowdown is likely to impact the global economy too.
Still, if the market has learned anything about Trump, it's that he is very unpredictable. It's quite possible Trump doesn't follow through on his promises or uses the tariffs as more of a bargaining chip to negotiate with other countries. Or perhaps Trump imposes smaller tariffs than expected. Regardless, the S&P 500 increased nearly 70% during Trump's first term, so big picture, stocks readily shook off the headaches from his tariffs long term.
Investors should, however, be prepared for some volatility once Trump formally takes office because the market is still trying to piece together just how extensive any new tariffs could be.
