The Trump administration implemented 25% tariffs against Canada and Mexico on March 4, as well as an additional 10% tariff on goods from China -- bringing the total tariff on Chinese-made goods to 20%. The countries swifly issued retaliatory tariffs on U.S. imports, escalating tension between the countries and rattling the stock market.
Major indexes dropped sharply after the tariffs took effect, with the S&P 500 (^GSPC 0.08%) falling by 2.96% since Monday, as of this writing. The Nasdaq (^IXIC +0.12%) dipped by around 2.98% in that time, while the Dow Jones Industrial Average (^DJI 0.52%) slipped by 3.01%.
If you're feeling nervous about the future of the market, you're not alone. Here's how the tariffs could affect the economy, plus a game plan for protecting your investments going forward.
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How tariffs might affect the economy
Tariffs can affect the economy and the stock market in several ways, primarily by way of raising costs and potentially influencing inflation. Ryan Monarch, an economics professor at Syracuse University, told The Motley Fool in a recent interview that we're likely to see both short- and long-term effects of tariffs: "Tariffs cause the price of affected goods to rise. In fact, research into the 2018-2019 trade war has shown that the prices of U.S. imported goods affected by tariffs rose by nearly the entire amount of tariffs imposed, meaning that U.S. importers bore the brunt of the increase in costs."
"The short run is also characterized by significant uncertainty about what trade policy will look like, leading to the pulling back of investment and production for many companies," he continued. "In the long-run, inflation expectations may become less stable, and as consumers come to expect inflation, this itself can lead the Federal Reserve to take stronger tightening actions."
Because the U.S. is already in a precarious position with inflation, tariffs could potentially exacerbate the problem. A 2025 study from the Federal Reserve Bank of Boston found that 25% tariffs on Canada and Mexico and the additional 10% tariff on China could increase the core inflation rate by 0.8 percentage points.
Surging inflation could push the Federal Reserve to take more drastic measures to constrain prices -- especially after the inflation rate unexpectedly increased earlier this year after months of consistently slowing.
How to protect your investments
When the market takes a turn for the worse, the most important thing you can do is avoid any knee-jerk reactions.
We don't know how long this dip will last, or whether it will turn into a larger bear market or recession. Selling off your stocks in a panic could be costly if prices rebound quickly. Case in point: When the market plunged in March 2020 due to fears surrounding the COVID-19 pandemic, those who'd continued investing throughout the downturn saw the biggest rewards when the market almost immediately recovered.
Instead of avoiding the market, focus on doubling down on strong investments. Healthy companies are more likely to weather economic downturns, even if they're hit hard in the short term. The strongest stocks will have solid business fundamentals, like a competitive advantage in the industry and a knowledgable leadership team to guide the company through rough waters.
Downturns are a normal part of the market's lifecycle, and the vast majority of stocks manage to pull through. Historically, every single bear market has been followed by a bull market. No matter how tough things may get, even the worst downturns are only temporary.
Now is also a good time to double-check that you have a well-stocked emergency fund. If stock prices continue to drop, the last thing you'll want to do is sell your stocks for less than you paid for them -- potentially locking in steep losses. With a solid emergency fund, you can leave your money in the market even if you face an unplanned expense.
These are nerve-wracking times for investors, and it's normal to feel anxious about the stock market's future. But by investing in quality companies, avoiding panic-selling your stocks, and staying in the market for the long haul, it will be much easier to protect your investments against volatility.
