Over the weekend, the administration announced a new round of tariffs to go into effect on Tuesday, prompting questions about potential market impacts and portfolio implications. President Trump declared a national emergency on his first day in office, which gave him sweeping economic powers, including the ability to implement tariffs. The administration has framed these tariffs as a tool for gaining leverage on immigration policy and combating illicit drug trade, signaling a broader use of economic measures beyond trade objectives.

After President Trump’s announcement, the leaders of Canada and Mexico responded, vowing retaliatory tariffs on US goods. By Tuesday evening, the 25% tariffs on Mexican and Canadian imports were postponed for 30 days after both Justin Trudeau, the prime minister of Canada, and Claudia Scheinbaum, the president of Mexico, held discussions with President Trump. In both cases, they agreed to provide additional border security and increase efforts to curb fentanyl crossing their borders into the US. However, tariffs on Chinese imports were implemented with an additional 10% tariff on goods already subject to a 25% tariff. China has since announced retaliatory tariffs on select American imports and has initiated antitrust investigations into some US companies, including Google.

The proposed tariffs injected volatility into the global equity and currency markets. The US stock futures market dropped over 2% on Sunday night in preparation for a tough day on Monday. The NASDAQ index dropped 2.7% at its low on Monday, and the Dow and S&P 500 indices dropped more than 2.0% during the day. The indices recovered a little by the end of the day, with the Dow suffering the most significant decline, down 1.5% at market close, while the S&P held up the best, falling 1.3%. The following day, after proposed tariffs on Canada and Mexico were delayed, the indices moved higher, with the NASDAQ recording the best day, up 1.4%.

The tariffs, if fully implemented, would likely lead to increased financial market volatility, upward pressure on prices and possibly interest rates, notable global currency fluctuations, a possible recession in Canada and Mexico, and downward pressure on corporate earnings multiples, particularly in industries reliant on cross-border trade. With total US imports valued at $3.3 trillion and total personal income at $25 trillion, a 25% tariff increase on all imports would be roughly equivalent to a 3% tax increase on all income, assuming the tariff costs are passed on to consumers.

Trade policies can shift rapidly, and history has shown that tariffs can be imposed—and reversed—just as quickly. Long-term investors should focus on fundamental drivers, such as earnings growth, valuations, and diversification, rather than reacting to short-term policy changes. Even if tariffs are not fully implemented, US economic growth is leading the developed world, and our financial markets are positioned to outperform under multiple scenarios.