With President Trump announcing the reciprocal tariff on 2 April 2025, and the S&P 500 index dropping over 10% in two days while other markets are behaving similarly, it is very clear that the global financial markets are facing a level of uncertainty greater than at any time in recent memory.
The reason is that uncertainty is emanating from multiple sources:
- The breadth and depth of President Trump’s policy changes; aiming to transform the global economic and trade landscape;
- Geopolitical tensions, even among historic allies;
- The potential of higher inflation;
- Artificial Intelligence’s (AI) impact on infrastructure and business.
The nature of these risks is very different, creating a situation that is very hard to analyse the impacts. The chart below shows that global policy uncertainty has risen dramatically in the last few months, and is now approaching the height seen during the COVID pandemic.
Source: CICC Research
Global trade has been hugely beneficial for the global economy and the US economy, as countries are able to utilise their comparative advantages and produce overall benefits. So, higher tariffs will hurt the utilisation of comparative advantages and therefore will be less efficient.
Regarding the new US reciprocal tariff, we can see that:
- It affects more than 60 countries, including those that are traditionally aligned with the US economically and politically — the EU, Japan, and many other countries in Asia;
- The magnitude of change, by one estimate, will increase the average US tariff from less than 3% to over 20%.
We want to analyse these policy changes objectively. US imports count for around 19% of its total Gross Domestic Product (GDP). It is a large number, but not overwhelming. And the tariff will hurt those companies that rely on the global supply chain the most.
For example, Nike has over 40% of its production in Vietnam and 90% from outside of the US. In the short run, it is impossible for Nike to adjust its supply chain. The likely scenario will be price increases for US consumers who like to buy Nike products, and consumers likely will delay purchasing or find cheaper substitutes.
Source: CNN
Tracking US Tariff Trends Through the Decades:
Source: CICC Research
With These Unprecedented Policy Changes and Market Volatility, What Should Ordinary Investors Do?
1. Avoid Short-Term Decisions Amid Noise
There will be many opinions and views on what will happen. Contradicting views already exist among “experts.” There will be a lot of noise, and this often induces investors to make short-term investment decisions and trade. Time and time again, it has been proven that when things are unclear and there is a lot of noise in the market, it is wise to take a step back and not rush into decisions, rather than trying to time the market and profit from rapidly changing market events.
2. Assess the Impact of Tariffs on Your Finances
Examine how the tariffs will impact your overall financial health. Is your job or income directly impacted? Are your assets or liabilities being affected? For example, one of my friends’ businesses manufactures Christmas lights in China and exports them to the US market. His business was significantly impacted between 2018 and 2020 when the US increased tariffs on Chinese-manufactured goods. Many of his peers moved their factories to Southeast Asian countries, but he did not. He had to close down his business and transition to other areas.
If your business and income are directly impacted, you will need to re-evaluate your balance sheet, cash flow, financial goals, and risk tolerance, and then make a more informed decision on your asset allocation.
3. Review and Diversify Your Portfolio
After reviewing your financial situation, the next step is to re-examine your portfolio to ensure it is still a good fit for your goals, financial situation, and risk tolerance. The most important thing to do is to ensure it is well-diversified. With the amount of uncertainty introduced by US policy changes, it is even more critical to ensure your portfolio is well-diversified across different asset classes—stocks, bonds, and cash—as well as geographic regions: the US, the EU, Japan, China, emerging markets, etc. Diversification is the only proven approach to reducing risk. Trying to time the market or picking the “winning” countries is very dangerous.
For most individual investors, there is a tendency to invest more in one’s own country. Now is the time to re-examine this and ensure that at least a good portion of your portfolio is allocated to other countries.
4. Ensure Adequate Emergency Savings
It is also a good opportunity now to review whether you have six months’ worth of emergency savings set aside. If you do not, it would be wise to start setting aside an emergency fund.
Finding a New Equilibrium
We do not know exactly what the future holds. What we do know is that short-term volatility will pass. We have faced similar or worse short-term shocks in the past (e.g., the 2020 COVID-19 pandemic). What historical events have taught us is that humans, companies, countries, and the global economy are extremely resilient.
We shall be able to find a new equilibrium after this shock to continue driving the long-term economy forward and produce long-term economic benefits.
Source: Dimensional Fund Advisors
This is an original article written by Dr Peng Chen, Senior Advisor and Director at Providend, Southeast Asia’s first fee-only comprehensive wealth advisory firm.
If you have Mandarin-speaking friends who are interested to learn more about the impact of tariffs on Chinese investors around the world, you can listen to this 有知有行 audio podcast, where Dr Peng was a guest.
For more related resources, check out:
1. Moods and the Market: How to Invest and Keep Investing
2. Principles for Successful Investing
3. Avoid These Mistakes in Equity Investing
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