Trade tariffs have been hogging the headlines since last year, and have been a sticky debate point heading into the 2024 US elections. With newly-elected US President Donald Trump in office, the fear of tariffs is front and center in investors’ minds.
On his first day in office, President Trump shied away from slapping tariffs, which provided some relief to investors and was reflected in the stock market’s price action. However, later in the day, Trump said he would impose tariffs on Canada and Mexico on February 1.
If history is any indication, tariffs have been a drag on the US economy and have had a negative impact on the stock market’s performance. As an investor, your primary goal is to protect your portfolio from large drawdowns. To achieve this goal, you’ll need to regularly monitor the stock market’s price action.
Tariff Talk
Tariffs can be both beneficial and detrimental to the overall economy. The general consensus is that they will increase the prices of imported goods, which will hurt consumers. On the other hand, they can increase domestic production and make the US economy more profitable, resulting in higher wages and increased domestic consumption.
The effects of tariffs on the US economy will take years to unravel, but the stock market reacts instantly. The lack of tariff slaps on day one of Trump 2.0 sent the broader stock market indexes higher. The S&P 500 ($SPX) closed at a new high on January 23. The Nasdaq Composite ($COMPQ) and Dow Jones Industrial Average ($INDU) are approaching their all-time highs.
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But what if President Trump indeed slaps tariffs on Mexico and Canada on February 1? Will this benefit or hurt the US economy? It could go either way, which is why investors should monitor the US’s performance relative to other countries.
Domestic or International Stocks?
The US economy is strong, corporate earnings are solid, and investors are complacent. However, the implementation of tariffs could change the narrative, which is why investors should monitor the US market’s performance relative to the rest of the world.
The chart below provides a comprehensive overview of the US market’s performance compared to the rest of the world over three years. The top panel displays the performance of the Vanguard Total World Stock ETF (VT), Vanguard Total Stock Market ETF (VTI), and Vanguard Total International Stock ETF (VXUS). The middle panel compares the US market’s performance to the world’s, and the bottom panel compares the US market to international stocks.
FIGURE 1. WEEKLY CHART OF THE US STOCK MARKET VS. THE REST OF THE WORLD. The US stock market, represented by VTI, is the outperformer, over three years.Chart source: StockCharts.com. For educational purposes.
A glance at the above chart shows US stocks are outperforming international stocks. If this reverses, then it’s time to reevaluate your portfolio and decide whether you want to allocate your assets across global stocks.
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In addition to monitoring relative performance, investors should keep an eye on the US dollar. A strong dollar indicates the US economy is performing well relative to other countries. The daily chart of the US Dollar Index ($USD) shows the US dollar continues to be resilient, despite its pullback after peaking on January 13, 2025.
FIGURE 2. DAILY CHART OF US DOLLAR VS. CANADIAN DOLLAR AND MEXICAN PESO. Keep an eye on the strength of the US dollar relative to the Canadian dollar and Mexican peso.Chart source: StockCharts.com. For educational purposes.
The lower panels display the US dollar relative to the Canadian dollar and Mexican peso. As of this writing, the US dollar retains its strength, although it’s moving sideways relative to the two currencies.
Canada and Mexico could be the first countries to face tariffs. When Trump didn’t mention tariffs when he was signing executive orders, the Canadian dollar rose, but later in the day, as it was announced that Canada would be slapped with tariffs on February 1, the Canadian dollar lost ground. Monitoring the performance of the respective currencies relative to the US dollar can reveal strengths or weaknesses in the US economy.
The US is the world’s largest importer of manufactured goods. If tariffs are imposed, many sectors and industries will get caught in the trenches of the trade war, some experiencing a greater impact than others. Which sectors could get hit the hardest?
Sector Watch
Assuming Trump enforces his proposed tariffs on imports from China, Canada, and Mexico, the sectors that will bear the brunt are Technology, Materials, Industrials, and Consumer Discretionary.
Technology
Tariffs are only going to be applied to components manufactured in other countries. Semiconductor and hardware companies could be affected, but those that rely mostly on cloud services or ad revenues may not see significant changes.
Materials
The US depends on Canada and Mexico for many resources, such as aluminum, zinc, copper, and nickel. These are used to produce aircraft, home appliances, medical equipment, and home construction. Manufacturers will face higher costs if 25% tariffs are implemented.
Industrials
The US imports automobiles and light-duty motor vehicles, motor vehicle parts, heavy-duty trucks and chassis, and motor vehicle electrical and electronic equipment from Mexico and Canada. The US consumer will be faced with higher automobile prices if tariffs are implemented.
Consumer Discretionary
If tariffs don’t increase domestic production, then the US consumer will face higher prices. As a result, consumption will decline for discretionary items such as new cars, home appliances, and consumer electronics.
The PerfCharts tool in StockCharts helps you monitor which sectors are outperforming and which are underperforming. The chart below shows the performance of Technology, Materials, Industrials, and Consumer Discretionary sectors over one year.
FIGURE 3. PERFORMANCE OF TECHNOLOGY, INDUSTRIALS, MATERIALS, AND CONSUMER DISCRETIONARY SECTORS. Over the past year, Consumer Discretionary is in the lead, up 34.34%. Will it maintain its lead if tariffs are imposed?Chart source: StockCharts.com. For educational purposes.
Consumer Discretionary is leading the pack, but, if tariffs are imposed, it could lose its lead. If your portfolio is overweighted in stocks in this sector, it may be time to reallocate your assets among different sectors.
The Bottom Line
During President Trump’s first term, the stock market declined after tariffs were announced. That doesn’t mean a similar scenario will take place this time. With the uncertainty surrounding tariffs, investors need to prepare for any scenario to surface.
Be sure to follow the stock market by monitoring the broader indexes, the performance of the US market relative to the rest of the world, the US dollar’s strength, and sector performance. Staying abreast of stock market action will help you identify investor sentiment changes, which, in turn, will help position your portfolio for success.
Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.