Tariffs Trigger Investor Caution Amid Market Uncertainty

According to Goldman Sachs Global Investment Research, the U.S. stock market falls in both instances, when it announces tariffs and when other countries announce retaliatory tariffs.

What Happened: Economist Justin Wolfers, who is a professor at the University of Michigan, in an X post, highlighted Goldman’s research and pointed out that tariffs could be detrimental to the markets in the short term.

Wolfers, who is also a senior fellow at the Brookings Institution and Peterson Institute, said, “We lose when we punch and we lose when we’re punched.”

According to the Goldman graph shared by Wolfers, the S&P 500 fell 5% on the days when the U.S. announced tariffs and 7% on days when other countries announced retaliatory tariffs. However, these moves partially reversed, later in the week.

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Why It Matters: President Donald Trump was sworn in earlier this week on Monday, and participated remotely in the World Economic Forum in Davos, Switzerland, on Thursday. In his speech, he reaffirmed his threat to impose tariffs to encourage domestic manufacturing, sending a clear warning to European business leaders.

“If you don’t make your product in America, which is your prerogative, then, very simply, you will have to pay a tariff, differing amounts, but a tariff which will direct hundreds of billions of dollars, and even trillions of dollars into our treasury,” he said.

Trump has hinted at a 10% tariff on all Chinese imports, effective Feb. 1, in response to China sending fentanyl to Canada and Mexico. “Frankly, I suspect that China is relieved that the tariff is only 10% since up to 100% tariffs had been threatened previously,” said Louis Navellier of Navellier & Associates.

“A 10% tariff on Chinese goods is not expected to be inflationary since the U.S. dollar is so strong compared to the Chinese yuan. Obviously, President Trump is serious about eliminating fentanyl and the pressure has been turned up on China, Canada, and Mexico,” he added.

Ed Yardeni and Eric Wallerstein, in their weekly economic note, highlighted that increased tariffs could lead to higher prices for American consumers. They expect the dollar to strengthen on higher tariffs which will lead to lower revenues for foreign exporters in their local currency. However, “If tariffs lead to expanded capacity in the U.S., that could be disinflationary,” the note added.

Price Action: As the Trump administration’s new policies take root, the market has been resilient over the last six months and the year. The SPDR S&P 500 ETF Trust tracking the S&P 500 has gained 25.62% over a year, whereas the SPDR Dow Jones Industrial Average ETF Trust tracking the Dow Jones advanced 17.80% in the same period.

Image via Shutterstock

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