Tariff Tensions: Why staying invested beats market panic

Global markets have entered a new era of uncertainty with the US government imposing new tariffs on steel, aluminium, and other imports, sparking concerns about global trade disruptions. President Donald Trump’s administration has introduced 25% tariffs on steel and aluminium imports, targeting Canada, Brazil, Mexico, and South Korea. In response, Canada has retaliated with its own 25% tariffs on $30 billion worth of U.S. imports, while Mexico has signalled potential counter-tariffs on American agricultural exports.

These developments have triggered sell-offs in key sectors, including automotive and construction, while European markets have demonstrated resilience due to proactive fiscal measures and a more stable economic outlook. This divergence underscores a key investment principle: diversification is critical in protecting portfolios from region-specific risks.

See here what Paraplanner of GSB | B Corp? - Aaron McAuley Chartered MCSI had to say below.

Markets react to tariffs and uncertainty

United States: the impact of new trade barriers

The new round of tariffs has sent shockwaves through US industries, particularly those that rely on imported raw materials. These companies are now grappling with higher costs, with many warning that these price hikes could lead to lower profit margins and potential job losses.

According to Reuters, companies such as General Motors and Tesla have already signalled rising production costs, while homebuilders warn of increased expenses for materials, potentially slowing the housing market. Meanwhile, the US manufacturing purchasing managers' index (PMI) has fallen to 50.3, reflecting weaker demand and slower production growth.

The labour market is also showing signs of strain, with only 151,000 jobs added in February, falling short of expectations. The unemployment rate has inched up to 4.1%, raising concerns about the broader economic outlook.

Further uncertainty was introduced when President Trump met with leading US corporate executives to discuss the potential economic fallout of his trade policies. While he defended the tariffs, stating that they would protect domestic industries, many business leaders expressed concerns about rising costs and market instability.

The equity markets have responded negatively, with major indices, including the S&P 500 and Nasdaq, experiencing sell-offs. Sectors heavily reliant on imported goods, such as technology and industrials, have borne the brunt of investor anxiety.

Europe: stability amid US volatility

While US markets face trade war-induced uncertainty, European markets are showing resilience, benefiting from fiscal stimulus measures and proactive central bank policies.

• The European Central Bank (ECB) has cut its key interest rate to 2.5%, supporting economic expansion.
• Germany's incoming government has proposed a €500 billion infrastructure fund coupled with an overhaul of borrowing rules. This ambitious plan is designed to revitalise the nation's infrastructure and strengthen its defence capabilities, marking a significant shift in fiscal policy to address current economic challenges.

This relative stability in Europe highlights the importance of global diversification—while one market faces headwinds, another can offer potential upside.

The case for diversification

These contrasting market conditions reinforce the value of diversification as a risk management tool. Investors with portfolios concentrated in the US may face higher risks due to tariff-related volatility. In contrast, those with global exposure, including European equities, are better positioned to offset losses.

Diversification extends beyond geography, it also includes investing across asset classes such as equities, bonds, and alternative investments. A well-structured portfolio can help stabilise returns and reduce exposure to sudden economic shocks.

The high cost of market timing

Periods of heightened volatility often tempt investors to pull out of the market in an attempt to avoid losses. However, history has shown that market timing rarely works.

Why staying invested matters:

• Over the 30-year period from February 1, 1994, to January 31, 2024, investors who remained fully invested in the S&P 500 Index achieved an average annual return of 8.0%
• Missing the Best 10 Days: Investors who missed just the 10 best-performing days during this period saw their average annual returns decrease to 5.26%.
• Missing the Best 20 Days: Those who missed the 20 best days experienced a further decline in average annual returns to 3.41%. (Source Wells Fargo Advisors)

These figures underscore the risks of exiting the market too early—while volatility can be unsettling, long-term investors tend to benefit from market recoveries.

Conclusion

Market volatility is inevitable, especially during periods of economic and political uncertainty. However, history has consistently shown that reacting emotionally to short-term swings is not a sound investment strategy.

Instead, maintaining a globally diversified portfolio, staying invested, and taking a long-term perspective remain the best ways to navigate uncertain times.

With U.S. markets facing tariff-related headwinds and Europe benefiting from policy-driven stability, now is the time to ensure your portfolio is well-balanced for resilience.

Disclaimer:

GSB Capital Ltd is registered with the Dubai International Financial Centre (DIFC), Licence No. CL4377, and is regulated by the Dubai Financial Services Authority (DFSA). The information provided in this article is for general information purposes only and does not constitute financial, investment, or professional advice. Any opinions expressed are based on current market conditions and are subject to change without notice. Investors should seek independent financial advice before making any investment decisions. Investing involves risks, including the potential loss of capital, and past performance is not indicative of future results.