Tariffs, Stocks & Your Money: What You Need to Know.
Markets are feeling the impact of US President Donald Trump's tariff announcements, but he remains firm in his stance, justifying his actions by stating, "sometimes you have to take medicine to fix something."
Experts have addressed some of the most commonly asked questions as the world tries to navigate this chaos and speculates on how long it might last.
How Does A Stock Market Index Function?
Simon Jack, the BBC's business editor, explained that the FTSE 100, which includes the 100 largest publicly traded companies in the UK, was all grouped together back in 1984. Each company was assigned a specific weight in this grouping based on its size.
The stock market reflects the overall value of these companies over time. Larger companies carry more weight in the index. For instance, AstraZeneca and HSBC have more influence than smaller firms.
The same concept applies in the US with the S&P 500, which consists of the 500 largest companies, heavily weighted towards major players like Apple, Nvidia, and Amazon.
The stock market indicates how the value of shares in these companies fluctuates, particularly focusing on the biggest names.
In general, it serves as a gauge of the worth of some of our largest companies, and when their values rise or fall, it provides insight into market sentiment regarding their future profitability.
How Do Market Downturns Impact Pensions And Everyday Life?
Jack points out that the stock market's movements don't always reflect what's happening in the broader economy. While they can be connected, they aren't identical.
For those who invest directly in stocks, a downturn will definitely hit them hard. We've seen some significant drops recently, some of the largest since the market panic during the pandemic in 2020.
Another way people feel these changes is through their pension funds. Investing in pensions is a long-term strategy. Not all of your money is tied up in stocks; a portion goes into government bonds. As you approach retirement, your investments will shift more towards cash and bonds, which means you might not feel the impact as much.
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There are two main types of pensions: defined benefit pensions, which guarantee a certain percentage of your salary upon retirement, and defined contribution pensions, where the value of your pension pot fluctuates with the market.
While pensions are currently vulnerable, remember that pension investing is a long-term endeavor.
The real concern isn't just the value of your pension pot; it's the potential effects on the economies where we live and work.
Many are now suggesting that the likelihood of a recession in the US, UK, and even worldwide has increased, which could have serious consequences for jobs and wages.
How Do Americans Feel About Tariffs?
There's a growing skepticism about tariffs among the American public, though opinions tend to split along party lines.
A recent poll indicated that just over half of Republicans, 52%, believe tariffs benefit the economy, while 58% of independents and a whopping 89% of Democrats think they are harmful.
However, this survey was conducted before Trump's global tariffs took effect and before the stock market lost trillions in value. We'll soon see how this economic upheaval has shifted public opinion.
One major reason behind President Trump's potential win in the 2024 election is that many voters believe he can effectively boost the US economy and address rising prices.
However, numerous economists caution that implementing tariffs could lead to higher costs for American consumers since nearly all imported products would be taxed.
This situation could result in inflation, an economic slowdown, or even a recession.
How Much Of This Is Tied To China?
Some people argue that this whole situation is essentially an economic proxy battle with China, with the goal of leveling the playing field, as Jack mentioned.
Trump does have a point when he says that US markets are generally more accessible to foreign products compared to how open other countries are to American goods.
Take the UK, for instance; they impose a 10% tariff on US cars, 14% on certain beef products, and 8% on various other items. So, there are trade barriers on both sides.
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While Trump claims that other nations have been taking advantage of the US, it's actually American companies that have strategically sought to maximize shareholder profits by relocating their production to the most advantageous locations.
It's the leaders of these corporations who have set up subsidiaries in Ireland, attracted by its low tax rates, and shifted manufacturing to places like Vietnam or Cambodia. This approach has been a logical pursuit of profit, contributing significantly to America's wealth.
China, on the other hand, is also becoming quite prosperous and is advancing in terms of technology and production capabilities.
There seems to be a sense of comfort when China was primarily producing inexpensive sneakers and t-shirts, but as they start developing supercomputers and missiles, the US becomes increasingly uneasy, which is part of the reason for the rising tensions.
Will The Markets Bounce Back?
That's the big question right now, according to Davison, but one thing we can count on is increased volatility.
We got a glimpse of how the markets might react on Friday when Trump mentioned he had talks with Vietnamese officials about a potential deal.
Vietnam is currently facing a hefty 46% tariff from the US, which is quite substantial. However, the country has hinted that it might eliminate all tariffs on US goods. This news caused stocks like Nike and Lululemon to rise, as these brands have a strong presence in Vietnam.
Overall, I think we might see a downward trend in the markets, but certain stocks could perform better, especially if there are signs of possible exemptions.
It's hard to predict what Trump will decide—he's made strong statements about his policies being set in stone, yet he has also hinted that some deals could be on the table.
Final Thoughts
While the current market turbulence and economic uncertainty are undeniably concerning, it’s important to remember that markets have weathered crises before and will eventually recover. The volatility we’re witnessing is a temporary result of reckless decisions made by Trump, driven more by ego than strategy. His tariffs, rather than solving problems, have only intensified global instability.
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However, history shows us that economies are resilient. With proper leadership and thoughtful policies, we can navigate these challenges and come out stronger on the other side. The future may be uncertain, but the right actions will guide us toward recovery, far beyond Trump’s self-serving bluster.
