How tariffs impact financial markets

How do tariffs work?

It seems like every time you look at the news, there’s a new announcement about tariffs, trade agreements, or other political changes. It’s hard to keep up, let alone understand what it means for your investments. Right now, the United States is implementing tariffs on most products imported from Canada and several other countries. This is leading to retaliation, as other countries are adding their own tariffs. All of this is leading to higher prices for some items, bans on others, and a bigger emphasis on local products (you’ve probably noticed that businesses in your neighbourhood are highlighting products that are made in Canada).

What’s a tariff and how does it affect me?

Basically, a tariff is a tax—but with one key difference. Instead of a sales tax, like the one you pay when you buy a new shirt from the store, a company initially has to foot the bill. Imagine a U.S. business owner placing regular orders from a Canadian exporter for ice skates. Because the U.S. government placed tariffs on products coming from Canada into the United States, the American business owner must pay more for the item. So, if a pair of skates once cost $100, a 25% tariff means it would now cost the U.S. owner $125. Typically, businesses will pass this cost down to the consumer, which means the customer (the ice skater) in the United States ends up paying more for the skates.

Stock market volatility explained

These changes are happening quickly, and the stock market is reflecting that instability. No one knows what will happen next, and that leads to market volatility, a term used when the price of a stock or a stock index moves up or down. You’ve probably heard of the Dow, S&P 500 Index, or our Canadian equivalent, the S&P/TSX Composite Index. These help investors quickly see how the market is performing. Basically, when things are uncertain or there’s a dramatic change, the market tends to react badly, meaning stock prices go down. And then, when things start to settle, so does the market, and prices go back up. Keep in mind that markets tend to operate in a cycle, so even if moods seem grim now, they’ll improve.

Long-term investing vs. market reactions

Of course, knowing that the economy cycles between highs and lows doesn’t make it easier for you right now. But consider two past events in recent history: the 2008 great recession and the more recent COVID-19 pandemic. Understandably, many people worried about their savings and investments during the financial crisis. Some even panicked and changed or even sold their investments.

• During the great recession in 2008, the economy struggled in the short term but in about two years, Canada more than bounced back even better than most countries.

More recently, COVID-19  affected almost every industry and about one-third of Canadians were unemployed or working fewer hours. By 2024, the economy  was over more than 7% larger than before the pandemic and there were 1.4 million more jobs.

What does the economic uncertainty mean for my retirement investments?

When stock market values go down, you’re likely to see the value of your retirement investments go down as well. But retirement investments are unique because they’re part of your long-term plan. As a result, you need to stay invested for the long term and not  overly focused on the short-term ups and downs.

Investing for the long term means that your retirement investments should be diversified. The benefit of diversifying or spreading out your investment choices is that if some are dipping, like U.S. stocks, others are on the rise. Investing for the long term also means that, generally, the closer you are to retirement, the less risky your investments should be.

If you participate in a group retirement plan, your savings may be invested in target-date or target-risk funds, which are already diversified based on your risk level or planned retirement date—which means you don’t have to worry about balancing them yourself. If you’re choosing your own investments and you’re nearing retirement, you may want to consider reducing your level of risk, depending on how close you are to retirement and how much risk you have in your portfolio. If you have time before retirement, it’s generally best to keep your money where it is, as you still have time to make up for any short-term losses.

It’s hard to see your investments drop, even just a little bit. But those who keep investing during hard times can become the biggest winners.

Managing tough times ahead

It’s easy to panic when you hear about a huge drop in the market, a change in interest rates, or another economic headline. It’s likely there will be more worrying news in the months ahead. However, it’s important to remember that saving for retirement is different whether you’re retiring in 10 years or you just started working. It’s a long-term savings goal and that means there will naturally be ups and downs with your investments. So take a look at the bigger picture and try to ignore the day’s headlines. Sometimes, inaction can be the best action.