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Vanguard economist Kevin Khang outlined three main points for investors on dealing with tariffs.<\/strong><\/p>\n Since President Donald Trump took office in January, he has consistently pursued his campaign promise to raise tariffs. Last week, he signed an executive order imposing tariffs on Canada, Mexico, and China. While the proposed 25% tariffs on Canada and Mexico were delayed for a month, the 10% tariff on imports from China remained intact.<\/p>\n This week, Trump introduced new tariffs, specifically a 25% tariff on steel and aluminum imports from all countries. The most significant impact will likely be felt by Canada, Brazil, and Mexico, as they are the largest steel importers to the U.S.<\/p>\n Initially, stock markets reacted negatively to the tariff announcements, trending lower on Tuesday morning. However, as the day progressed, they managed to bounce back slightly. This situation has created uncertainty for many investors trying to navigate the emerging trade war.<\/p>\n In a recent Q&A on Vanguard\u2019s website, senior international economist Kevin Khang provided insights into the latest round of tariffs and offered strategies for investors. He emphasized that while there are potential disruptions, there are also opportunities to be found.<\/p>\n Khang suggested that understanding the potential impact of tariffs begins with examining historical precedents. He referenced two distinct examples from the past.<\/p>\n During Trump\u2019s first term, the tariff increases in 2018 were broad and targeted many trading partners. Over the subsequent two years, these tariffs underwent numerous changes, including exemptions and adjustments. Ultimately, the focus narrowed primarily to steel and aluminum, resulting in a \u201cmore surgical and measured outcome than initial proposals suggested.\u201d During this period, GDP growth remained solid, fluctuating between 2.5% and 3%, excluding the pandemic year of 2020, when the economy contracted by 2%.<\/p>\n The second example Khang cited was the Smoot-Hawley Tariff Act of 1930, which raised the effective tariff rate on imported goods to approximately 20%. This led to retaliatory tariffs from many trading partners and likely exacerbated the Great Depression. The Smoot-Hawley Tariff Act was repealed in 1934, illustrating how unsuccessful trade negotiations can lead to adverse economic outcomes.<\/p>\n \u201cFor long-term investors, this means understanding potential volatility that might arise as markets digest the impact of a highly fluid narrative on the future of the international trade landscape,\u201d Khang noted.<\/p>\n<\/blockquote>\n When discussing how markets are interpreting the current tariffs, Khang indicated that they appear to be drawing parallels to the tariff negotiations of 2018\u20132019.<\/p>\n \u201cI say that because until late on Friday, January 31, markets seemed not to have assumed that there would be immediate implementation of 25% tariffs on imports from Canada and Mexico,\u201d Khang explained. \u201cHowever, on February 3, with the prospect of the tariffs looming, large intraday movements indicated that markets were beginning to price in this possibility.\u201d<\/p>\n<\/blockquote>\n Following the February 1 order, the dollar appreciated rapidly against both the euro and the yen, while market participants began to anticipate a two-year inflation expectation exceeding 3%. Stocks experienced losses, particularly among automobile manufacturers and homebuilders, who were most directly affected by the proposed tariffs.<\/p>\n However, these trends reversed after negotiations with Canada and Mexico resulted in a delay of the tariffs by a month. Khang noted that these intraday movements provide insights into how markets initially perceived the likelihood of tariffs being implemented as proposed.<\/p>\n Khang outlined three key strategies for investors navigating this environment. First, he advised expecting volatility.<\/p>\n \u201cTariff negotiations are ongoing with multiple nations, which leads to uncertainty and fluidity, so volatility could quickly escalate depending on how things develop,\u201d he stated.<\/p>\n<\/blockquote>\n Second, to manage this volatility, investors should maintain broad diversification across and within asset classes.<\/p>\n Lastly, Khang highlighted the potential benefits of actively managed portfolios.<\/p>\n \u201cOutperformance in this type of policy-news-heavy environment may require good judgment in discerning signals from noise and an ability to tactically execute on opportunities that may be short-lived,\u201d he noted.<\/p>\n<\/blockquote>\n In the long term, Khang suggested that changes in the global trading ecosystem could present both disruptions and opportunities.<\/p>\n \u201cFor instance, supply chains have already evolved since the 2018\u20132019 tariffs, with China now accounting for much less of the market share for U.S. imports than before 2018,\u201d he explained. \u201cThese changes, though disruptive, can offer opportunities for new businesses positioned to take advantage and for astute active investors who can identify such businesses early on.\u201d<\/p>\n<\/blockquote>\nLooking to History<\/span><\/strong><\/h2>\n
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More Like 2018 Than 1930<\/span><\/strong><\/h2>\n
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Tips and Opportunities for Investors<\/span><\/strong><\/h2>\n
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