On Monday, markets received a shock: the U.S. announced new tariffs on goods from China, Canada, and Mexico. The immediate response was a significant market sell-off as investors scrambled to make sense of what the new trade measures would mean for global commerce. But before the day was over, news broke that tariffs on Canada and Mexico would be delayed for a month, offering some temporary relief.
Despite this, the market’s reaction was clear—uncertainty around trade policy is unsettling. This isn’t the first time we’ve seen markets respond this way to tariffs. In fact, if history is any guide, the 2018-2019 U.S.-China trade war is the best comparison we have. History may not repeat itself, but it often rhymes. By looking back at what happened during that period, we can better understand what may be coming and how to prepare.
The Impact of the 2018-2019 Trade War on the U.S. Economy
The tariff war that unfolded between the U.S. and China during 2018 and 2019 caused significant disruptions across industries. Prices for raw materials rose, businesses experienced supply chain bottlenecks, and uncertainty spread like wildfire through corporate boardrooms. As a result, many businesses pulled back on investments and hiring. Economic activity, particularly in the manufacturing sector, slowed.
Reports from the Federal Reserve’s Beige Book during that time highlight the ripple effects tariffs had across the economy. Manufacturers reported higher costs and lower profit margins, retailers saw price increases, and contractors noted project delays due to the uncertainty surrounding trade policies. The general mood across industries was cautious, and many firms opted to reduce production and postpone capital expenditures until there was more clarity on trade agreements.
This period taught us that protectionist policies like tariffs tend to weigh on growth in the near term. However, these impacts, while significant in the short run, did not permanently derail economic or market performance.
How Markets Reacted During the Trade War
The 2018-2019 tariff war sent financial markets on a volatile rollercoaster. Stock prices often moved sharply depending on the latest developments in trade negotiations. When talks between the U.S. and China broke down, markets sold off. Conversely, when negotiations resumed or progress was announced, stocks surged.
Despite these wild swings, markets ultimately recovered and thrived once there was more certainty. The S&P 500 ended 2018 down 4.38%, weighed down by tariff concerns and a slowing global economy. However, in 2019, following the announcement of the Phase I trade deal between the U.S. and China, the S&P 500 rebounded with a staggering gain of 31.49%. Chinese markets followed a similar pattern of recovery after sharp declines in 2018.
What does this teach us? Markets are highly sensitive to uncertainty, especially when it involves global trade. But once clarity is achieved—whether through agreements or a clearer understanding of long-term impacts—markets have historically rebounded strongly. Investors who remained disciplined and avoided knee-jerk reactions during the 2018-2019 trade war were ultimately rewarded.
What Today’s Tariff News Means for Investors
As we navigate this new round of tariffs, it’s crucial to remember the lessons of the past. Markets are likely to experience heightened volatility in the coming weeks and months as the situation evolves. However, long-term investors should avoid getting caught up in the short-term noise. Instead, focus on maintaining a well-diversified portfolio and keeping your long-term goals in mind.
Uncertainty tends to create opportunities for those who can remain patient and strategic. History suggests that today’s tariff concerns may eventually fade into the background once there is more clarity on trade policy. For now, investors should monitor key indicators such as business investment, consumer sentiment, and corporate earnings to gauge how deeply tariffs are affecting the broader economy.
Fortunately, there are reasons to remain optimistic. Earnings season has been strong so far, with 77% of S&P 500 companies reporting better-than-expected profits. The blended earnings growth rate for the fourth quarter is tracking at 13.2%, which would mark the strongest year-over-year growth since the end of 2021. These results suggest that, at least for now, U.S. companies are resilient in the face of policy uncertainty.
The Role of Central Banks in Navigating Trade Uncertainty
Major central banks around the world are also paying close attention to the impact of tariffs on economic growth. Last week, the Bank of Canada and the European Central Bank cut interest rates, citing concerns over slowing economic activity tied to global trade tensions. Both institutions adopted a more dovish stance, signaling that they are prepared to take further action if necessary.
In contrast, the Federal Reserve decided to hold interest rates steady for the time being. However, Fed officials emphasized that they remain “data-dependent” and are closely monitoring how tariffs and other policy measures are affecting the U.S. economy. While no immediate rate cuts are expected, the Fed’s cautious stance suggests that it could step in if conditions deteriorate significantly.
Inflation, Growth, and the Risks Ahead
One of the most common questions we hear is whether tariffs will lead to higher inflation. Historically, tariffs do cause short-term price increases as businesses pass on higher costs to consumers. However, these effects tend to subside once tariffs are removed or supply chains adjust. For this reason, I believe the greater risk is not inflation but slower economic growth. If tariffs remain in place for an extended period, businesses may continue to delay investments, which could weigh on GDP growth.
Retaliatory tariffs from other countries could further amplify these risks, creating a drag on global growth. While the U.S. may be better positioned than some of its trading partners to weather a prolonged trade war, the cumulative impact of multiple tariff battles could still take a toll on the domestic economy.
Final Thoughts: Staying Calm and Strategic
As headlines around tariffs continue to dominate the news cycle, it’s easy to get caught up in fear and uncertainty. However, it’s important to take a step back and look at the bigger picture. Trade tensions are not new, and history shows us that markets are resilient. Investors who stay calm, maintain diversification, and focus on long-term goals are often the ones who come out ahead when the dust settles.
For those with a long enough time horizon, short-term market sell-offs may even present attractive buying opportunities. If you have questions about how these developments could impact your financial plan, now is a great time to speak with a financial advisor. Together, we can build a strategy that helps you navigate volatility and stay on track to meet your goals.
Remember: Markets dislike uncertainty, but they thrive on clarity. Stay informed, stay diversified, and stay the course.
