BUDGETINGINVESTINGLIFESTYLE & TRAVEL

Tariffs and How They Impact Investing

Recently, you may have heard more about tariffs than ever before. It’s important to understand what tariffs are and the impact they have. For example, investors should be aware that tariffs can affect investment portfolios.

Tariffs 101

Tariffs are a tax on goods that are imported from other countries. When a good is imported into the United States, a tariff (tax) is paid at entry points by the importing company. The purpose behind tariffs may vary, including things like penalizing foreign governments, protecting domestic industries, or fostering goals related to national security.

Tariffs and Investing

The good news is that tariffs do not have a direct impact on the stock market. However, they do still affect the market indirectly. Tariffs tend to raise prices on imported goods even if the company or factory is located within the United States. A key reason for this increase is due to those factories or companies using materials, machinery and supplies that are imported. With the increase in price for specific goods and services, it may place a company’s bottom line or profits in jeopardy. The result of profit loss ultimately impacts investors’ expectations for performance, causing stock prices to fall.

Additionally, tariffs can impact consumer spending because of price increases. When materials increase in price, many companies pass the increased cost onto their customers, which may result in reduced spending. Lack of consumer spending in conjunction with increased costs for companies can mean profits lower than expected, thus affecting the valuation of the company at that snapshot in time. If the company is valued less because of these factors, then the stock price may decrease, creating an overall decrease in a consumer’s investment portfolio.

As with life, investing ebbs and flows, which is important to remember. As noted in the article Emotions and Investing, historical data indicates that the market tends to recover over a period of time. It’s crucial to keep this in mind as you manage your own investments. Investing is a long-term commitment that will weather the storm of market fluctuations, recessions and tariffs. Remember to do your research before investing and keep the perspective of the longevity of your commitment.

Sources:

https://money.usnews.com/investing/articles/how-will-tariffs-affect-your-investments

https://institutional.fidelity.com/advisors/insights/topics/market-commentary/tariffs-what-they-are-how-they-work-and-how-they-affect-the-stock-market