Zacks Investment Management

Shawn and Haley B. from Roanoke, VA ask: Hi Mitch, with tariffs returning to center stage in terms of economic policy, we’re wondering if inflation will become a concern again. Do you think that could make Treasury bonds more attractive as the year progresses? Thank you.

Mitch’s Response:

Thanks for writing. Your question offers valuable insight by drawing links between higher tariffs, higher prices, and the bond market’s response to higher prices or the expectation of higher prices.

It’s this last point—regarding inflation expectations—that I think investors should be focused on.

Looking back on President Trump’s first term, we’re able to make a few assessments about tariffs that can inform how investors position this time around. Some readers may remember the 2018 steel tariffs on Mexico and Canada, which rattled markets and were met with retaliatory tariffs. Within a year, though, the tariffs were dropped, and NAFTA was replaced by the U.S.-Mexico-Canada Agreement—which expanded NAFTA’s scope and opened doors for more trade, not less.

There was a lot of other trade and tariff posturing, but the duties that ultimately stuck were tariffs on Chinese imports. The market, economic, and inflationary impact of these tariffs has arguably been quite muted, in my view, as measured by total trade and equity market performance over that period. A lot of trade was ultimately rerouted through countries like Vietnam and Mexico.

How Tariffs and Inflation Shape Market Volatility

Market fluctuations often raise tough questions for investors, especially when policy changes—like tariffs—impact expectations. Understanding these dynamics can help you make informed decisions during uncertain times.

In our complimentary guide, “Navigating Market Volatility¹,” you’ll find answers to key questions, including:

• Market downturns can and will occur, but what should you do?
• How can diversification help you manage volatility without compromising your returns?
• When volatility is too much for you to handle, how can a money manager help?
• Can volatility actually be an opportunity?

If you have $500,000 or more to invest and want to get answers to the questions above, click on the link below to download this guide today!
 
Download Zacks Volatility Guide, “Helping You Manage Market Volatility.”¹

Anyone following the news over the weekend likely felt some alarm at the new 25% tariffs on Mexico and Canada, along with an additional 10% tariffs on Chinese imports. But within hours of the market’s opening on Monday, the tariffs on Mexico were delayed by one month. This is not to say that there is a low likelihood of tariffs sticking and an all-out trade war breaking out. But there does seem to be a pattern here, and it’s one where the worst feared outcomes do not come to fruition (read: positive surprise for markets).

That all being said, there is one key difference between tariffs in President Trump’s first term versus tariffs today. And that difference is inflation.

In President Trump’s first term, inflation expectations were firmly anchored in the 2% range (see chart below). Consumers had not experienced significant inflation in decades, and businesses were reluctant to pass along any higher costs.

Inflation Expectations Have Come Down from 2022 but Remain Above 2%

Today, inflation expectations have not quite come back down to the 2% level, and consumers and businesses are more sensitive to price increases and the potential for higher input costs. To the extent that tariffs and escalating trade tensions result in rising inflation expectations, it can have a realized effect on actual inflation as consumers pull forward purchases and businesses raise prices preemptively. If Treasury yields move higher for this reason and not because of expectations for higher growth, we could see some consternation in equity markets.

The more benign outcome, and one that we’d hope for, is that accelerating economic growth pushes bond yields higher alongside appreciating equity markets, in which case investors across the growth and income spectrum benefit. In my view, if we see more targeted and limited tariffs (better-than-expected outcomes) along with deregulation efforts and stimulative fiscal policy, this can serve as a catalyst for the current business cycle.

As tariffs, inflation expectations, and shifting bond yields influence today’s markets, it’s important to have a strategy in place. To help you manage current market changes, I recommend downloading our free guide, “Navigating Market Volatility³.” It answers key questions such as:

• Market downturns can and will occur, but what should you do?
• How can diversification help you manage volatility without compromising your returns?
• When volatility is too much for you to handle, how can a money manager help?
• Can volatility actually be an opportunity?

If you have $500,000 or more to invest and want to get answers to the questions above, click on the link below to download this guide today!

Disclosure