The Trump tariff induced stock market downturn: What investors should keep in mind

Michael Joyce, CFA, CFP

After the market close on April 2, President Donald Trump announced a sweeping new tariff regime that imposed tariffs on nearly every other country in the world. This led to a market meltdown with trillions of dollars of losses from retirement accounts — at least on paper.

So what now? Here's what investors should consider as these events unfold.

Why the tariff announcement matters

Many economists believe that large scale tariffs are inflationary as it drives up the cost of imported goods. To the extent that consumers spend less, aggregate demand and therefore economic growth slows, which reduces corporate earnings. Even if companies absorb a portion of the tariff-induced tariffs, doing so negatively impacts earnings.

What is the most important thing for investors to keep in mind

Most financial goals are long-term. Despite short-term downturns, well diversified portfolios have produced positive real (inflation-adjusted) returns over the long-term. For short-term goals or funds that may be needed in the next year or two, you should “immunize” these cash flow needs in secure investments where you don’t have to worry about liquidating risk assets in the middle of a downturn. This is your “sleep at night” money.

How long will this stock market downturn last?

It is unknown how long the market impacts from the Trump administration tariffs and the potential global trade war will be with us. It is likely that it will take some months before many of the economic impacts are known. Moreover, it is difficult to predict a bottom to a market correction, but typically the majority of a market downturn happens early on in a correction. 

To be sure, the stock market could go lower. This is a function of both economics and emotion. However, the question is not how much further can stocks drop but whether has the drop caused securities to be priced right (i.e., were they overvalued before) or have they become undervalued considering their long-term prospects.

Opportunities and diversification

Opportunities inevitably emerge in risk assets during a market pullback. Many become even better opportunities before a correction runs its course.Examples abound from past steep downturns including Black Monday (1987), the dot-com bubble bursting, the 9/11 terrorist attacks, the Great Financial Crisis of 2008-2009 and the COVID-19 pandemic in 2020.

However, don’t take advantage of opportunities at the expense of diversification. Having a diversified portfolio has certainly served investors well so far this year and over the long-term.

Be patient

Don’t make rash decisions. Avoiding the downturns may mean missing out on the upside as well. The markets will recover at some point. In past cycles, missing the best 10 days in the market cut returns in half. But if the pain of the downside hurts more than the joy of the upside, perhaps you should re-evaluate your tolerance for risk and re-allocate funds in the future. You’ll have plenty of time to do so.

Michael Joyce, CFA, CFP, is the executive managing director, mid-Atlantic leader for CW Advisors, LLC, a registered investment adviser under the SEC Investment Advisers Act of 1940, as amended (“RIA”), which is headquartered in Boston. Registration does not imply a certain level of skill or training. He can be contacted at michael.joyce@cwadvisorsgroup.com.

For additional information, visit http://www.cwadvisorsgroup.com or visit the Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov by searching with CWA’s CRD #310873.