US President Donald Trump’s announcements of sweeping tariff hikes have created turmoil in financial markets and left governments around the world searching for answers. Stocks plunged, bonds and gold jumped, and the US dollar index tumbled by the most in two decades. 

​

The US bore the brunt of the selloff that raced through financial markets Thursday after Trump rolled out the highest tariffs in over a century, which are threatening to disrupt supply chains, slow growth and rekindle inflation. The S&P 500 has slumped 10% since the announcement, while the Nasdaq is now down 20% - officially a “bear” market – since the start of the year. And as shown in the chart below the volatility index - known as the fear gauge – has doubled in just 2 trading days.​

Source: investing.com

​The turmoil underscored the remarkable shift in sentiment just two months into Trump’s presidency. Traders initially bet that he would supercharge growth by cutting taxes and regulations, downplaying his tough talk on trade during the election campaign. But concerns started to build last month as he started pushing up tariffs, upending global alliances, and moved to aggressively slash federal spending and the size of the workforce.

​

The economic impact will take longer to play out, although it does seem like a worst-case scenario for China, where Trump’s move brings average US tariffs on the exports that power the economy to at least 65% when counting pre-existing duties. Australia got the minimum 10% tariff, but this is unlikely to have a direct impact on our economy as only around 5% of our exports are into the US.

​

Nonetheless, Australia is not immune to any global economic slowdown or increased inflation that may be consequences of US tariffs if they are all fully implemented. However, there no guarantee that the tariffs will be implemented as stated. There is a distinct lack of clarity on how many of the tariffs are just “negotiating tools” and even how long the tariffs will last. However, leaving the door open to negotiation is also layering uncertainty on top of uncertainty – and if there is one thing that financial markets really don’t like it's uncertainty.

​

The most likely outcome if tariffs are implemented as announced is that inflation will rise and economic growth will slow. This is a bad combination, and will no doubt stoke fears of a US recession that will have ramifications around the world.

​

Central banks are caught between a rock and a hard place – on one hand, they need to cut rates to stimulate the economy, but on the other hand, they will be reluctant to do that if inflation starts rising again. At this time bond markets are pricing a number of central bank rate cuts this year to reflect the expected slowing in the US and global economies. The Trump administration may get its desired rate cuts, but not via the path they had expected.

​

When equity markets are rising it is easy to stick with the key principles required to be a successful long-term investor; but it gets far harder when markets start to fall and the future is uncertain. Emotional responses - driven by fear, loss aversion or the temptation to act - can often lead investors away from long-term value and into bad decisions.

​

The current tariff turmoil has created a great deal of uncertainty, but we should be wary of reading too much into the short-term reaction. Sudden market sell-offs have happened many times before and will happen many times again. Stock markets are doing exactly what they are meant to do – react to new information as it happens. Volatility reflects discomfort, not dysfunction.

​

We know that markets can be volatile in the short term. But we also understand that having a long-term plan and sticking to that plan through periods of market volatility can help keep you on the right track toward reaching your financial goals.

​

Dr Steve Garth

April 5, 2025