U.S. President Donald Trump has said that his global trade war will introduce a new “golden age” for the U.S. economy, one that includes lower prices, greater wealth, and more jobs. This new economic renaissance will, President Trump has claimed, be a result of his global tariffs. Despite saying his tariffs will bring in $2 billion per day, the early indicators suggest these promises will not come to fruition.
How Will Tariffs Impact the U.S. Economy?
First, a little background on how tariffs work. In the case of the U.S., tariffs are taxes imposed on imported goods. They are typically a percentage of the value of an item; a 20% tariff on a $10 item would result in the importer paying an additional $2 in tariffs.
The tariff is collected by the customs authority, but ultimately the importer pays this tax. So, on one hand, the government does generate income from import taxes, but the importer is responsible for paying them. And they have to recoup their money. Rarely do businesses absorb those increased costs. Instead, they are passed on to the customers.
To avoid these increased charges as much as possible, U.S. businesses have been importing goods at a rapid pace before the tariffs kick in. This resulted in the U.S. economy shrinking in the first quarter by 0.3%. That’s a dramatic change from the fourth-quarter 2024 growth of 2.4%. It also marks the first time the U.S. economy has experienced a quarterly contraction in three years.
We know this was a result of businesses getting ahead of the tariff deadline because imports ripped 41.3% higher, fuelled by a 50.9% increase in goods. Imports are subtracted from gross domestic product (GDP), as a result, in the first quarter, the big swing into negative territory does not necessarily mean the U.S. economy is doing poorly. GDP could reverse in the second quarter.
There was some good news. Consumer spending, which accounts for approximately 70% of U.S. GDP, grew 1.8% in the first quarter, though that number was down from 2024.
The fact remains that most Americans are concerned about how tariffs will impact their personal spending and the broader U.S. economy.
How Have Stocks Responded To Trump’s Tariffs?
President Trump has acknowledged that the stock market has been volatile since first announcing his tariffs against Canada and Mexico in February. Stocks then took a big dive in early April after President Trump unveiled his “Liberation Day” tariffs.
Historically, April is one of the best months for the stock market. Since 1945, it has rewarded investors with an average return of 1.6%. More recently, since 1971, April has been the second-best performing month for the S&P 500.
It’s a different story in 2025, though, with economic uncertainty undermining the broader stock market. In fact, it was a tumultuous month, marked by the biggest stock market declines since the early days of the Covid pandemic.
During the month, investors also had to contend with huge single-day surges as well. Despite the massive daily shifts, the monthly change for April wasn’t as dramatic, with the S&P 500 falling 0.76% and the Dow losing 3.1%. The Nasdaq finished the month up 0.9%; this was due in large part to the big end-of-the-month surge.
While it was the third consecutive month of declines for both the S&P 500 and Dow Jones, the decline in April was less for both indexes than it was in March.
A closer examination of the performance of the S&P 500 this year shows that the biggest downward moves have a strong correlation to when President Trump made tariff announcements; especially after his “Liberation Day” announcement on April 2.
It’s not all bad news. Stocks have been rebounding since late April on news that progress has been made between the U.S. and China with regard to a trade deal that could result in the U.S. lowering the 145% tariff placed on the country. This again goes to show how much the stock market, which is forward-looking, does not like the idea of President Trump’s tariffs.
What Can Investors Do During a Trade War?
Historically, periods of extreme volatility are generally followed by strong stock market returns. While your gut may be telling you to sell, analysts say you should stock up on quality stocks.
For example, Wall Street’s most widely known measure of the market’s estimate of expected volatility in the S&P 500 is the Cboe Volatility Index or VIX. When the VIX spikes to a level of 40 or more, which indicates significant volatility, the S&P 500 has, on average, been up 30% a year later. Further out, the odds of stock returns being positive 12 months later were above 90%.
For context, this past April, the VIX spiked to more than 50. Since 1990, the average daily close for the VIX has been around 19.50.
Instead of standing on the sidelines during a trade war, it’s a great time to recalibrate a portfolio and diversify across various sectors. Especially those that may not be as affected by tariffs the same as others might. This could include utilities, consumer staples, and grocers.
Some investors like the idea of adding precious metals to their portfolios. Why? Gold is a traditional hedge against geopolitical uncertainty and tends to perform well during periods of market volatility.
A trade war fits the bill. Gold recently hit a record high of $3,500 per ounce. It’s been on a pretty strong run since the 2001 September 11 attacks.
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