This article explores the economic and investment impact of recently introduced US tariffs and how investors can navigate market changes.

What has happened and why?

On the 2 April 2025, coined as "Liberation Day", the US introduced a set of tariffs, increasing import taxes on goods worldwide entering America. This will have significant implications for several industries and the global economy. The US has for a long time, run a dual trade and budget deficit, contributing to economic imbalances and industrial decline. Consumer demand has shifted away from domestically produced goods, leading to a deteriorating manufacturing sector and a shrinking workforce. By imposing tariffs, the US administration aims to address the trade deficit by shifting the global trading system in favour of American industries, thereby restoring jobs and revitalising domestic industries. By using a straightforward formulaic approach to calculate tariff levels, the US, in many cases, is merely matching the protectionism policies of its trading partners. This action is seen by many as the start of a global trade war, leaving the rest of the world facing critical decisions on how to respond.

What happens next?

All other factors being equal, higher tariffs and trade barriers are likely to slow economic activity and increase inflation rates (stagflation), at least in the immediate term. Imported goods will become more expensive, and there may be short-term disruptions to supply chains. Since the announcement, we have seen China has already retaliated with reciprocal tariffs. China's swift retaliation with reciprocal tariffs, coupled with other nations seeking US negotiations exemplifies the potential pattern of policy adjustments we can anticipate from trading partners over the medium to long term. If countries with existing protectionist policies do negotiate to lower trade barriers, the negative impact could be reduced. However, if the trade war escalates, the supply shock for the US could become more severe, worsening the negative GDP impact for larger trading partners. Companies and consumers will also reassess their saving, spending, and investment options. Central banks will be caught between managing inflation risks and slowing growth, and will likely adjust their policies to maintain sustainable growth and price stability. Increasing global policy divergence may be an outcome.

What does this mean for investors?

Whilst a dynamic global economy is expected to adapt, investor uncertainty will likely remain elevated. Global equity markets swiftly reacted to the news with noticeable declines, and sustained short-term volatility is expected as markets navigate the complexities of trade-driven inflation and geopolitical risks. In this environment, risk assets, such as equities, will likely demand a higher premium, while high quality bonds and inflation-protected securities may offer resilience. In the past, a withdrawal from risk assets has usually been triggered by fears originating in the underlying economy (pandemic or global financial crisis). Arguably, the current situation is entirely policy induced. In theory, this can be immediately reversed, however, it is unlikely the US administration will do so off their own back, more likely it will require concessions from other countries allowing a policy de-escalation. However, the longer the battle, the higher risk of lasting economic damage. Long-term investors should avoid making tactical or short-term changes to well-considered investment plans. Diversification and balance remain key.

Is there anything I should do?

We understand this is likely to be a worrying time for investors with so much noise in the media and with much of it lacking balance or a long-term outlook. Although it may not feel like it, it has not been all bad news this year. As at the close of trading on 7 April 2025, the US stock market has dropped significantly (14%) year-to-date but, other markets (such as the UK, down 8% in the same period) and asset classes (UK Gilts up 2.25%) have performed better. Despite the challenges posed by tariffs, historical evidence suggests that well-diversified portfolios with appropriate risk management strategies can withstand market fluctuations. Ultimately, maintaining a long-term outlook remains the most effective strategy for mitigating short-term market volatility and achieving sustained wealth growth.

Indices used for performance figures: Indices as at close of trading on 07/04/2025. S&P 500 Index FTSE All-Share Index Bloomberg Sterling Gilts

Buzzacott Financial Planning is authorised and regulated by the Financial Conduct Authority. This article has been prepared to keep readers abreast of current developments. Professional advice should be taken in light of your circumstances before any action is taken or refrained from. The value of investments, and the income from them, may go down as well as up and investors may not get back the amount originally invested.