President Donald Trump's plan for tariffs on imports has guided the stock market's direction over the past few weeks. The initial plan, with double-digit tariffs for countries around the world, shook the market, even pushing the Nasdaq Composite(NASDAQINDEX: ^IXIC) to fall into a bear market.
Investors worried that such duties, paid by the importer, would increase prices for U.S. consumers and companies -- and that would hurt economic growth and corporate earnings. Economists even warned a recession could be right around the corner.
Earlier this week, however, an initial tariff deal with China -- the country facing the highest level at 145% -- prompted investors to sigh with relief. The countries agreed to significantly lower tariffs they'd imposed on each other and settled on an initial agreement while they complete trade talks. As a result, the Nasdaq, the S&P 500 (SNPINDEX: ^GSPC) and the Dow Jones Industrial Average(DJINDICES: ^DJI) each soared -- but will this continue?
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Trump's initial tariff plan
It's important to consider why stocks had fallen so much on news of the initial tariff plan. Trump aimed to impose tariffs on China, Mexico, and Canada, citing the passage of lethal drugs, namely fentanyl, across boarders into the U.S. But the president quickly broadened his plan to include countries worldwide and assigned different levels to different nations.
Investors fled U.S. stocks as they feared U.S. companies would suffer in two ways from such a plan. First, companies might increase prices to compensate for the higher expenses, which could result in declining sales. Second, companies could accept the added expense. In both scenarios, the tariffs would hurt earnings.
China was particularly concerning. Trump went on to pause tariffs for a 90-day negotiation period with countries but didn't include China in this pause, and many U.S. companies import materials and finished goods from China. A good example is Apple, which has long relied on China for the production of the iPhone. The president temporarily paused import tariffs on electronics products, but the fact that this wasn't a permanent move represented a risk for tech giants.
Crucial trade talks
All of this made trade talks between the U.S. and China crucial, which is why the indexes surged on the initial deal. The two countries agreed to decrease reciprocal tariffs to 10%. The U.S. maintained its additional 20% tariff on China regarding the fentanyl problem. As a result, the current tariff on imports from China is 30%, lower than the 50% to 60% range some strategists had been expecting.
The two countries plan on meeting again to iron out a full deal. However, this first agreement, in effect for 90 days, is a move in the right direction -- and the market has responded to that.
Will this positive stock market momentum continue? This deal and potential trade agreements to come with other countries, too, mean that U.S. prices won't face the same upward pressure economists' predicted just days ago. Some economists even have started saying a recession is less likely now. For example, Goldman Sachs just lowered its recession risk projection to 35% from 45%.
Even if companies still will face some increase in expenses, the impact will be manageable -- especially for well-established market leaders with strong balance sheets.
The risks ahead
It's possible that upcoming economic data, if disappointing, could weigh on investors' minds and slow down the stock market's recovery. Investors also may continue to see some volatility as the U.S. and China resume discussions and the U.S. tries to establish tariff deals with other countries. These elements could represent risks ahead.
However, the U.S.-China arrangement clearly is very positive, and here's more good news: Even if the benchmarks fluctuate in the coming weeks or months, that's OK. That's because, ideally, you'll aim to buy quality stocks at reasonable prices and plan to hold them for a number of years. As a result, any near-term shifts won't have a major impact on your overall performance.
That's why your best move now is to scoop up potential winners at reasonable levels, regardless of whether stocks skyrocket or stagnate. There still are many great opportunities there. Just hang on to your stocks for the long term.
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