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Note: Unless otherwise specified, currency amounts described in this article are in U.S. dollars, and government references are to the U.S. government.

Market Volatility: Stocks Drop on Tariff Fears

The stock market staged a “tariff tantrum” in response to President Donald Trump’s proposal to impose tariffs of 25% on steel imports and 10% on aluminum imports, with stocks declining sharply on Thursday, but mostly recovered lost ground by the close of trading Friday. The S&P 500® Index closed up 0.51% on Friday, while the Dow Jones Industrial Average closed down 0.29%.

Tariffs can result in increased prices for businesses and consumers, and reduce global growth, especially if other countries retaliate by imposing tariffs on U.S. exports to their countries. At this point, this is still just a proposal, and the White House has not yet released many details about the potential tariffs or how they would be implemented.

“The market doesn’t like uncertainty,” says Brad Sorensen, managing director of market and sector analysis for the Schwab Center for Financial Research. “We don’t know if the tariffs will be targeted or widespread, what the foreign reaction will be, or whether this is an opening shot in a battle for tighter trade restrictions or a standalone action designed to send a message in ongoing trade negotiations.”

However, Brad doesn’t expect a serious market tumble at this point. “It’s not in the best interests of the president or the United States to engage in extreme trade actions,” Brad says. “Meanwhile, stocks continue to be supported by strong corporate earnings and a solid economy. Severely restricting trade would likely lead to a far more serious pullback, but we don’t currently think that’s likely.”

In terms of sector impact, Brad says U.S. steel and aluminum companies initially rallied on the news, but the information technology sector—which relies heavily on foreign sales—was hurt by fears of an escalating trade war.

“But I don’t think [a trade war] is likely at this point, so I view a pullback in tech as a [buying] opportunity for those who are underweight,” Brad says.

The impact on the bond and currency markets

The tariff proposal initially pushed bond prices up and yields lower on the prospect that economic growth could slow. Over the longer term, however, tariffs can raise inflation, which tends to be negative for bonds.

“Tariffs raise costs, and if those costs are passed along to consumers, then inflation can rise,” says Schwab’s Chief Fixed Income Strategist Kathy Jones. “This may not be a consideration in the near term, but could limit the drop in bond yields longer term.”

U.S. Treasury bond prices sometimes gain when stocks sell off sharply, as Treasury bonds are frequently perceived as safe-haven investments in times of heightened volatility.

However, emerging-market and high-yield bonds may be hurt, Kathy says. Emerging-market countries tend to rely heavily on trade for economic growth, so a slowdown in global growth could have negative effect on their bonds. The move could also be negative for high-yield bonds of companies affected by metals costs, or that rely heavily on global trade. These companies tend to have fewer financial resources to deal with sudden economic challenges, Kathy says.

Meanwhile, the U.S. dollar slipped against the euro and yen, as traders feared an escalating trade war.

“Ultimately, this is not good for the dollar, since the U.S. has a large current account deficit to finance with foreign capital,” Kathy Jones says.

Uncertainty for international markets

“Not every new tariff constitutes a trade war,” says Schwab Global Investment Strategist Jeffrey Kleintop. “Metals have often been a target of U.S. tariffs, with steel tariffs imposed by each of Trump’s predecessors in the White House.”

However, this is an escalation of the relatively modest trade actions the Trump administration has taken so far, and may provoke some response by target countries that could pose further risk to the markets, Jeffrey says.

“The main focus will be on any retaliation from China,” he says. “There may not be any—China has made no specific promise of retaliation to the metals tariffs. But in recent months, the Chinese press has identified potential measures they could take that could affect agricultural products, aircraft, technology, and even Treasury purchases.”

Furthermore, the metals tariffs may be just the opening salvo targeting China, Jeffrey says, with potentially more to come in the coming weeks after the Trump administration completes its review of China’s alleged “theft” of U.S. intellectual property rights.

“This could result in tariffs, quotas and investment restrictions,” Jeffrey says. “This probe could be a much larger threat to markets than the metals tariffs, with potentially far-reaching implications for U.S.-China economic relations.”

China doesn’t make the list of top 10 sources of U.S. steel imports—the head of that list is Canada. Jeffrey says it’s possible the United States may develop exemptions from the steel and aluminum tariffs for some countries like Canada, muting their impact and easing some market worries about the breadth of the trade measures.

Other countries that are most likely to be affected include Brazil, South Korea, the European Union and Mexico, which combined account for more than 50% of steel imports to the United States, Jeffrey says.

Brazil, the number-two supplier of steel to the U.S., has signaled that it may target U.S. coal exports in response to the tariffs.

South Korea, the number-three supplier, has vowed to lodge a complaint with the World Trade Organization (WTO), but has not mentioned any specific retaliation.

The European Union nations make up a combined 10% of U.S. steel imports and, like Canada, may get an exemption from the tariffs. If not, leaders have vowed to “react firmly” with complaint to WTO and retaliation primarily focused on some select U.S. agricultural products.

Mexican officials haven’t specified targets for retaliation but did indicate that they may retaliate. Mexico imports a wide variety of agricultural products and machinery from the United States.

The takeaway for long-term investors

It’s very difficult to tell whether this will be a short-term blip or a potentially long-term issue for stock markets. It’s generally healthier for your portfolio if youresist the urge to sell based solely on recent market movements.

Every investor is different, but periods of market volatility can also be a wake-up call to make sure your portfolio is adequately diversified or to consider adding defensive assets, such as cash or U.S. Treasury securities, for stability. If you don’t have a financial plan, now might be a good time to talk to a planner about creating one. For more information on steps investors can consider during volatile markets, check out “Market Volatility: Here’s What You Should Know.”

Considerations for traders

The Cboe Volatility Index (VIX), a measure of volatility expectations, has jumped, partly in response to uncertainty about how quickly the Federal Reserve may choose to raise short-term interest rates and partly over the tariff issue, says Randy Frederick, vice president of trading and derivatives for Schwab. The VIX’s current level, at around 22, implies expectations of 30-point daily swings—in either direction—for the S&P 500, he said.

The market’s strong rebound from a correction in late January/early February had been a concern prior to Thursday, Randy says.

After recovering about 75% of the early February correction in only about two weeks, concerns were emerging that perhaps the market had come a little too far, a little too fast,” Randy says. “Technical traders may be watching for a retest of the February 9 lows, but another 5% drop in the S&P 500 would be necessary for that to happen. I don’t anticipate that at this time.”

Patience is key, Randy says. “We expect this pullback to eventually diminish and a new, potentially more modest, uptrend to begin,” he says. “However, traders should exercise patience in the coming days, and wait for a couple of solidly higher days with strength into the close, and a lower VIX, before adding equity exposure.”

Next Steps

    • Focus on the long-term. If you’ve built a solid financial plan and a well-diversified portfolio, it’s best to ignore the noise and focus on your long-term goals. Market volatility is unnerving, but it’s a normal—and normally short-lived—part of investing.
    • Learn more. Read and watch Schwab’s experts discuss strategies for weatheringmarket volatility.
    • Talk to us. Schwab is happy to discuss your portfolio whenever and wherever it’s convenient for you.
      • Call Schwab Customer Service at 800-355-2162.
      • Find a branchor a consultantnear you.
      • ConsiderSchwab Intelligent Advisory™—our automated portfolio technology with professional guidance. You can schedule a complimentary consultation with a Certified Financial Planner™ professional (CFP®) who can help you plan for retirement, college and future market volatility. To begin that process, fill out this online questionnaire.

Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market or economic conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Investing involves risk, including loss of principal.

Past performance is no guarantee of future results.

The policy analysis provided by the Charles Schwab & Co., Inc., does not constitute and should not be interpreted as an endorsement of any political party.

Diversification strategies do not ensure a profit and do not protect against losses in declining markets.

Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly.

International investments are subject to additional risks such as currency fluctuation, geopolitical risk and the potential for illiquid markets. Investing in emerging markets may accentuate these risks.

Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed-income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Lower-rated securities are subject to greater credit risk, default risk, and liquidity risk.

Futures trading carries a high level of risk and is not suitable for all investors.

Schwab does not recommend the use of technical analysis as a sole means of investment research.

Currencies are speculative, very volatile and are not suitable for all investors.

The Dow Jones Industrial Average™, also referred to as The Dow®, is a price-weighted measure of 30 U.S. blue-chip companies. The Dow® covers all industries with the exception of transportation and utilities, which are covered by the Dow Jones Transportation Average™ and Dow Jones Utility Average™.

The S&P 500 Index is a market-capitalization-weighted index comprising 500 widely traded stocks chosen for market size, liquidity and industry group representation.

The Chicago Board Options Exchange (CBOE) Volatility Index shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options.

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