Trump’s “America First” ethos may come at a big cost to the stock market.
The last two-plus years have been paradise for optimists on Wall Street. Since the start of 2023, the iconic Dow Jones Industrial Average (^DJI -0.99%), widely followed S&P 500 (^GSPC -0.95%), and growth stock-inspired Nasdaq Composite (^IXIC -1.36%) have respectively increased in value by 35%, 58%, and 89%, as of the closing bell on Feb. 6.
There is a slew of catalysts lifting the broader market higher, including the rise of artificial intelligence, strong corporate earnings, a decline in the prevailing rate of inflation, and more than a dozen high-profile companies announcing stock splits last year.
But perhaps nothing has been more influential for the stock market over the last three months than Donald Trump’s election night victory. During Trump’s first term in the White House, the Dow Jones, S&P 500, and Nasdaq Composite respectively rose by 57%, 70%, and 142%.
Wall Street appreciates the prospect of additional corporate tax cuts and deregulation, which can foster an uptick in merger and acquisition activity, as well as fuel stock buybacks.
However, not every action taken by President Trump is necessarily viewed as a positive by investors. With the president recently unveiling new sweeping tariffs, the question has to be asked: Can tariffs spark a stock market crash?
Tariffs have a decisively negative impact on the businesses exposed to them
A little more than a week ago, President Trump held true to his campaign promise of using tariffs to promote American interests by introducing a 25% tariff on select imports from Canada and Mexico, as well as a 10% tariff on imports from China.
Shortly after the tariffs on the United States’ direct neighbors were announced, respective 30-day stays on imposing these 25% tariffs were put into place. However, the 10% tariff on China did go into effect, with the world’s No. 2 economy retaliating with tariffs of its own, ranging from 10% to 15% on various American energy commodities and agricultural machinery.
The goal with tariffs is to protect domestic interests by making homemade products more cost-competitive with those being manufactured overseas. In other words, it promotes the “America first” ethos that President Trump campaigned on.
But based on a recent analysis conducted by Liberty Street Economics (Do Import Tariffs Protect U.S. Firms?), which publishes research reports for the Federal Reserve Bank of New York, public companies directly exposed to tariffs during Trump’s first term did endure a decisively negative impact on their stock price.
The four economists who contributed to the analysis took a close look at the performance of stock returns from 2018 to 2019 when then-President Trump initiated tariffs on China. Perhaps unsurprisingly, companies that were directly exposed to China via imports and/or exports performed statistically worse on the days these tariff announcements were made than companies without exposure to China.
However, this wasn’t the only disturbing correlation. Specifically, the companies that struggled and had direct exposure to President Trump’s China tariffs also saw average declines in their profits, employment, sales, and labor productivity from 2019 to 2021. In other words, this weakness persisted well beyond initial tariff announcement days.
One postulation from the authors is that input tariffs make it difficult for domestic producers to be price-competitive with foreign producers. Even though tariffs are, on paper, designed to take care of this, the authors differentiate between output and input tariffs. Tariffs on finished products (i.e., output tariffs), such as cars, are where some U.S. tariffs are directed. But they’re also imposed on inputs, which involve materials used for unfinished products (e.g., steel imports), and can work to increase prices on American-made goods, thereby making them less competitive on price.
While author evidence doesn’t foreshadow a crash for the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite, history does point to a clear weakness in equities.
History is a pendulum that swings in both directions and overwhelmingly favors the patient
As much as investors would prefer stock market corrections, bear markets, and crashes simply not occur, what makes the stock market a “market” is the ability for equities to move in both directions. If history were to repeat itself, tariffs and trade tensions between the world’s two leading economies would spell trouble for Wall Street.
History rhyming is nothing new for the stock market. But historic precedent can differ greatly depending on your investment horizon.
In June 2023, researchers at Bespoke Investment Group published a data set on social media platform X that examined the length of every bull and bear market in the S&P 500 dating back to the beginning of the Great Depression in September 1929. This 94-year period featured 27 separate bull and bear markets.
Bespoke’s analysis found the average downturn of at least 20% in the benchmark index lasted only 286 calendar days, or in the neighborhood of 9.5 months. In comparison, the typical S&P 500 bull market stuck around for roughly 3.5 times as long — 1,011 calendar days.
A recently updated study by Crestmont Research sheds further light on the importance of patience when putting your money to work on Wall Street.
Every year, Crestmont updates a data set that calculates the rolling 20-year total returns (including dividends) of the S&P 500 dating back to the start of the 20th century. Even though the S&P didn’t officially exist until 1923, researchers were able to track the performance of its components in other major indexes in order to back-test return data to 1900.
Crestmont’s rolling 20-year total return periods yielded 106 ending years (1919-2024). What’s noteworthy is that all 106 rolling 20-year periods would have generated a positive total return. This is to say that if an investor had, hypothetically, purchased a security that mirrored the performance of the S&P 500 at any point since 1900 and simply held onto their position for 20 years, they would have made money every single time. It didn’t matter if they purchased at a top or endured a crash-like event — they always came out a winner after 20 years.
The point is that even if President Donald Trump’s tariffs roil the stock market in the short term, history clearly shows the positive long-term outlook for equities remains unchanged.
