Can Anyone Predict the Tariffs' Impact on the Stock Market?

The stock market is without question unpredictable…constantly influenced by a myriad of factors that are beyond an investor’s control. If you’ve been an investor for a while, whether a “buy and hold” or a trader kind of chap, you know that the stock market – particularly in today’s world – responds rather quickly to a torrent of available information, which makes it a dynamic and ever-changing entity.

Based on that simple fact, do you possess information that the market collectively does not know? Do you somehow know whether Trump and the new team will maintain, raise, or lower tariffs…and if so, by how much or when? And how will other world leaders react? Of course, you don’t. In which case, it seems advisable to tread carefully before making buy or sell decisions based on the highly political current tariff chaos. Certainly until you evaluate – or reevaluate – your own risk tolerance.

Check out Vanguard Global Chief Economist Joe Davis and Head of Wealth Management Massy Williams' take on the recent market volatility in the video, and then I'll add my two cents below!

Risk Tolerance

Many of us have been here before…several times.  And if you’re losing sleep over what has been a relatively mild market decline in the grand scheme of things (so far), you might need to reassess your current asset allocation.

That’s not a recommendation that you join the current and inevitable flight to safety. It’s simply a suggestion that you reevaluate your risk tolerance. Very recent history has shown that significant market corrections are quite common. Take, for example, the Dot-com Bubble of 2000-2002, a period when widespread speculation and wildly bullish investment led to the extreme overvaluation of a young internet technology industry. During that period, the Nasdaq fell from its peak of over 5,000 in March 2000 to around 1,100 by October 2002 - a loss of nearly 80% of its value. 

And soon after, the 2007-2009 Financial Crisis arrived during which the S&P 500 lost 51.9% of its value. This latter incident, too, was fueled by excessive levels of leverage and speculation.  

And, who among us have forgotten the 2020 Bear Market triggered by a global pandemic? The COVID-19 malady accompanied by widespread fear that triggered layoffs, corporate shutdowns, and financial disruptions worldwide? In total, the Dow Jones Industrial Average bottomed out with a value loss of 37% while the S&P 500 hemorrhaged 34% during what proved to be a very short-lived 2020 Bear Affair. 

The methods for measuring the length and magnitude of Bull and Bear markets differ among the so-called experts, but to the large and growing category of “buy and hold” investors, it’s essential to anticipate such major downdrafts in the marketplace. They are simply part of the investment experience. And not a time to panic!

Market Volatility

Volatility is simply a constant in the stock market experience, and every correction has its own unique characteristics. The 2000-2002 period was a prolonged market decline, intensified by major accounting fraud scandals that shook investor confidence. In 2008-2009, the market, aggravated by a housing bubble, plunged significantly amid the collapse of major financial institutions. More recently, the 2020 crash saw a rapid valuation decline attributable to and coupled with the onset of a global pandemic. By the way, its surprisingly speedy recovery was measured in months, not years.

Each major market decline is typically accompanied by unique and frightening real-world events. All the more reason to understand that significant market declines don’t occur in isolation and are generally triggered by very unsettling occurrences. This often inspires an initial desire to flee. People lose sight of the market’s amazing ability to recover over time. But always remember: When you practice patience, diversification and quality in developing a portfolio, it WILL stand the test of time.

Portfolios and Market Declines

Developing a portfolio that stands the test of time demands that your prepare for those inevitable marketplace declines. It necessarily includes acknowledging the presence of fright-inducing experiences. Investors hope for continuous growth, but the reality of investing involves periodic corrections, which are often healthy. Maintaining a well-balanced portfolio that aligns with one’s risk tolerance and patience factor can help mitigate the impact of those fear-provoking episodes.

Here are ways that you can prepare for - and weather - the downturns:

• Psychological Preparation: Not to beat a dead horse, but mental and emotional preparation is equally important in navigating volatile market fluctuations. Understanding that fear and uncertainty are inherent in investing can help an investor remain calm during turbulent times. If engaging a financial advisor would help with insight and support, then go for it! Objective analysis from an informed and trusted third party might help to avoid emotional overreactions.

• Risk Management: Developing strategies to manage risk is vital. As mentioned earlier, diversification is a primary and effective principle of investing and involves the spreading of investments across various asset classes to reduce exposure. Routine portfolio reviews can ensure that an investment strategy remains aligned with an investor’s financial goals and that ever-important risk tolerance. And never forget the importance of an emergency fund to cover unforeseen expenses, particularly involving one’s retirement account. Emergency funds avoid the liquidation of investments during a market downturn as well as eluding the interruption of retirement savings. Such interruptions can play havoc with The Amazing Power of Compounding. In short, it’s a buffer that allows an investor to ride out a given market volatility or emergency without compromising financial security.

• Stay Invested: Informed  investors know that you have to stay invested in the market. An interesting historical tidbit reveals how costly panic selling can be: The market’s best days tend to follow its worst days. Missing out on the S&P 500’s 10 best days of each decade since 1930 would result in a return of about 76% compared with a nearly 25,000% gain had one remained invested (Source: Bank of America). In short, you gotta be there to enjoy those rare big market surge days!

In Sum

It’s no surprise that the stock market operates independently of individual political preferences…and responds rapidly to available information. Simply by embracing market volatility, developing risk management strategies, and psychologically preparing for downturns can help an investor successfully navigate the complexities of the stock market with confidence and resilience. This awareness of the probability of volatile market declines is essential in avoiding the instinct to flee.

Investing is a lifelong  journey that requires patience, preparation, and a clear understanding of the risks involved. In doing so, an investor can achieve his or her financial goals while weathering the inevitable storms that come with investing.

And remember, this tariff scare, too, shall pass.