Potential New US Tariffs and Market Impact

Welcome to Financial Fluency - a newsletter designed to boost your understanding of financial terms and provide you with investment ideas for long-term financial success.

In today’s newsletter:

• A Look at the Markets: January Performance

• Potential New US Tariffs and Market Impact

• Quote of the Day: Warren Buffett

• What I’m Watching/Reading:

• Word of the Day: Range-bound

• Whenever you are ready, here is how I can help you

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A Look at the Markets: January Performance

Vanguard FTSE All-Word ETF (Accumulating)

Long-term investors should be very happy with the performance of the FTSE All-World Index in January, with an increase of 4.25%.

Vanguard Corporate Bond ETF (Accumulating)

Meanwhile, the Vanguard Corporate Bond ETF was down for much of the month but finished with an increase of 0.58%.

iShares Core S&P 500 ETF (Accumulating)

You may frequently hear financial commentators advise investors to ‘simply invest in the S&P 500’. This month serves as an example of why I prefer an All-World index. The S&P 500 index slightly underperformed the All-World index this month.

Of course, I had no foresight of this outcome, and it is not guaranteed to occur in the future. Nevertheless, I recognise that by investing in an All-World index, I gain exposure to markets that are performing well without the need to make individual investment decisions.

Where did the extra gains of the All-World Index come from? The answer may surprise you - Europe!

iShares Core MSCI Europe ETF (Accumulating)

The MSCI Europe Index captures large and mid-cap companies across 15 Developed Markets countries in Europe. This month, the index returned an impressive 6.95%.

Bitcoin

Although the month of January ended slightly higher than it began, Bitcoin fluctuated within a range of approximately 92,000 USD to 108,000 USD throughout the month. At the moment, Bitcoin is range-bound.

Potential New US Tariffs and Market Impact

Recent developments in North American trade relations have created significant waves across financial markets. Let's explore these changes and their practical impact on businesses and consumers across the continent.

Trade Tensions and Temporary Solutions

The past week brought substantial shifts in North American trade dynamics. On February 1, the United States announced plans for new tariffs - 25% on most goods from Canada and Mexico. Both Canada and Mexico swiftly responded with matching measures against U.S. goods.

However, a breakthrough emerged on Monday when all three countries reached a temporary agreement. The U.S. agreed to pause these trade taxes for 30 days while working collaboratively on border security matters. This cooling-off period provides businesses with crucial planning time and helps stabilize market conditions.

Understanding Who Bears the Cost

While tariffs might seem like taxes on foreign companies, the financial burden ultimately falls on domestic consumers and businesses. Here's how the mechanics work:

When U.S. retailers import products from Mexico or Canada, they must pay these additional taxes upfront. To maintain profitability, they typically pass these costs along to consumers through higher prices. For example, a Canadian-made winter coat that normally costs $100 might increase to $125 with a 25% tariff.

This ripple effect extends throughout the economy. When consumers face higher prices across multiple product categories, their purchasing power diminishes, potentially triggering broader inflationary pressures.

Market Impact and Business Considerations

These trade developments affect various sectors in several important ways:

Supply Chain Disruption: Many industries operate integrated supply chains across North America. The automotive sector provides a clear example, where components might cross borders multiple times during production. Tariffs can significantly impact these established manufacturing networks.

Consumer Price Effects: Essential goods and everyday items could see notable price increases. Mexican agricultural products and Canadian raw materials, which are crucial for U.S. manufacturing and consumption, might become substantially more expensive.

Economic Implications: Beyond immediate price effects, these trade measures could influence employment patterns, investment decisions, and overall economic growth across all three nations. Small and medium-sized businesses might find it particularly challenging to absorb these additional costs.

Looking Forward: Next Steps

The 30-day negotiation window presents a critical opportunity for all three countries to develop sustainable solutions. Business leaders and economic analysts emphasize that stable, predictable trade relationships benefit the entire North American economic ecosystem.

For investors and business owners, staying informed about these developments remains crucial. The outcomes of these negotiations could significantly influence investment strategies and business planning across various sectors.

Key Terms to Remember:

• Tariff: A tax imposed on imported goods

• Supply chain: The network of organizations involved in moving products from supplier to end consumer

• Inflation: A general increase in prices and corresponding decrease in purchasing power

• Import/Export: The process of bringing goods into or sending goods out of a country

This situation continues to evolve, and its resolution will likely shape North American trade relations for years to come. Understanding these dynamics helps businesses and investors make informed decisions in an increasingly interconnected marketplace.

Quote of the Day: Warren Buffett

There is much truth in this quote. Warren Buffett states that his ideal holding period is ‘forever’.

Many investors sell at the wrong time, often when the price is low. If they had more patience, they might have seen their assets recover, particularly if they invested in a broad index.

As I write this, many markets are close to all-time highs.

Word of the Day: Range-bound

Range-bound - adjective - describes a financial asset or market that trades consistently between specific upper and lower price levels

Business Context:

In financial markets, range-bound conditions occur when prices move within a defined channel, showing clear resistance at the upper level and support at the lower level.

Example Sentences:

• The stock remained range-bound between $45 and $50 throughout the quarter.

• Gold prices have been range-bound as investors await clarity on interest rates.

• Traders developed strategies to profit from the currency's range-bound behaviour.

Trading Insight:

Range-bound markets often present opportunities for both active traders and long-term investors. While traders might capitalise on predictable price movements within the range, investors can use these periods to accumulate positions at consistent price levels.

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Disclaimer:

This newsletter is for informational and educational purposes only and should not be construed as financial advice. The information contained herein is generic and does not take into account your individual financial circumstances. You should always consult with a qualified financial professional before making any investment or financial decisions.

Additionally, the authors and/or publishers of this newsletter may hold investments in securities or other financial instruments mentioned herein. These are included for illustrative purposes only and should not be taken as a recommendation to buy or sell such securities or financial instruments.