A widely discussed topic today is the possibility of new tariffs imposed after the U.S. presidential inauguration on January 20.
We take a closer look into the possible response of the financial markets and the values of broad investable indices. Our analysis is based on historically observed responses from previous tariffs. We also summarize effects some of the tariffs had in the first month on the relevant sector indices, broad country investable indices, and FX rates, where applicable. The reason for the first-month analysis is that extending to longer periods makes it difficult to isolate other effects stemming from macroeconomic and political decisions that were made at the time.
The following two historical charts highlight U.S. tariffs imposed in January 2018 for imports of solar-energy components and large residential washing machines and in March 2018 for imports of aluminum and steel had minor to no impact on the value of broad equity, bond or volatility indices. Drops in any of the indices seem to be more related to other macroeconomic news or political decisions that happened at the time, such as favorable news on the labor market and inflation allowing for an interest rate increase in February 2018.
Let’s take a closer look at the details.
Impact from solar tariffs
During the first month of a new 30% tariff on imported solar panel components, the value of an Equity industry index representing China Semiconductors & Semiconductor Equipment, as well as Electrical Equipment dropped by 9%. Notably, there was a 4% drop in the first week alone.
The tariffs also impacted the value of an Equity industry index, representing US Semiconductors & Semiconductor Equipment, as well as the one for Electrical Equipment. Both dropped by 4% in a month, with a 2% - 3% decrease in the first week.
Many Chinese companies from the sector moved their production to other factory locations in South Asia to avoid tariffs. Then in June 2024 amid discussions of the possibility of U.S. tariffs against solar panel components imported from South Asia countries, the value of the respective Equity index for China Semiconductors & Semiconductor Equipment lost 12% in a month. In addition, the leading China company stocks in this sector lost 15% - 20% of their value.
After the U.S. Department of Commerce announced on November 29, 2024, its preliminary affirmative antidumping rates on crystalline solar cells imported into the U.S. from Malaysia, Cambodia, Vietnam and Thailand, the Equity industry index for China Semiconductors & Semiconductor Equipment dropped 4%, and the leading companies in this sector and country realized a 15% decrease in value.
Impact from washing machine tariffs
Equity industry indices holding washing machine producers have a diverse base of companies representing all consumer durables. Therefore, we examined the tariff impact on the leading companies in the industry, instead of Equity industry indices.
In the first month of imposing tariffs starting at 50% for large residential washing machines, stock prices of top washing machine exporters lost 5% - 7% of their value, with a 2% - 5% drop in the first week.
For exporters that moved their production to locations exempt from U.S. tariffs, their stock prices crawled back over time and the value of indices representing that industry restored their value in time as well.
Impact from steel and aluminum tariffs
In March 2018, the U.S. imposed tariffs on steel (25%) and aluminum (10%) imported from most countries.
During the first month, broad Industrial world indices dropped by 5%. Over the first 3 months, the indices dropped 3%.
In May 2018, those tariffs were applied to Canada, Mexico and Europe. In the first month, the value of the respective equity industry Canadian Mining & Metals index as well as the Steel Industry index dropped 6%, Mexico Steel Industry Equity Index dropped 4%, and Europe Steel Industry Equity Index fell 8%.
The Canadian dollar and Euro depreciated less than 1% relative to the U.S. dollar, and the Mexican peso appreciated around 6% relative to the U.S. dollar in the first month.
Impact from U.S.-China trade war
From analyzing the period of intense tariff threats and actual new rates applied by the U.S. and China, we observed negative impacts on both countries’ broad equity indices, bond indices and currency. If we focus on the more intense period of January - June 2018, we observed the broad equity index with a U.S. focus dropped by 4% and the China focus by 13%, U.S. bonds lost 2% - 5%, and the China Renminbi depreciated 3% relative to the U.S. dollar
Keeping in mind that period of almost six months in 2018 also captures additional macroeconomic and political effects on the market, we would not consider the tariffs as the sole pressure on index returns and currencies.
Based on the above historical observations of equity and bond indices as well as currencies, we summarize that the impact of tariffs imposed on a significant good or material for a particular industry results in:
An approximated 5% drop in the value of the respective Equity industry in the first one to four weeks after tariffs are imposed.
A 10% - 15% loss in stock values among the leading companies directly impacted by tariffs.
The impact on broad indices or currencies is only observed from broad, longer-term tariffs that involved actions from the affected countries.
To show how we can make this analysis actionable, let’s explore the impact from a couple of the scenarios shared in the public space in the last few months.
Analysis of hypothetical tariffs on cars and auto parts imported from Mexico
The U.S. imports a large portion of automobile components and cars from Mexico. Using the same methodology as our previous analyses, we could apply a 9% drop to the Mexico Auto Parts Industry Equity Index and a 4% drop to the US Auto Parts Industry Equity Index.
This scenario, when applied on broader investable indices as of January 10, 2025, induces a moderate 2% drop in equity markets. Government and corporate bonds experience negligible if any effects. Both of these impacts are in line with historically observed, broader-market impacts from specific industry tariffs.
Analysis of hypothetical longer-term tariffs and retaliation measures between the U.S. and Canada
In this hypothetical scenario we allow for multiple bilateral tariffs—for example, tariffs imposed by the U.S. and Canada. We base the assumptions on the US-China trade war section with similar returns on broader market investable indices as well as currency depreciation. Therefore, we created a composite scenario with a:
5% drop in U.S. equity broad index
10% drop in Canada equity broad index
5% drop in U.S. bonds broad indices
3% depreciation of the Canadian dollar
When we create the composite scenario in FactSet and run a Portfolio Analytics report on broad investable indices as of Jan 10, 2025, we observe the following hypothetical returns for Canada and U.S. equities and bonds as a simplified example.
Equities lose more value compared to corporate bonds, which was expected based on our scenario definition and observations from the other historical impacts in our overall analysis. Additionally, given the scenario is based on observations from historical events, there are larger impacts on the non-U.S. indices compared to the respective U.S. indices.
The above analysis with historical data provides a simplified example of how to test the effects of investment portfolio values with various scenarios of potential tariffs imposed on U.S. imports. We based the hypothetical scenarios on historical observations from similar cases in the past and the responses of investable market indices. These could be elaborated within the stress test module of the FactSet Portfolio Analytics report with the additional views for FactSet users.
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