In the face of rising tariffs, it can be crucial to understand their impact on the stock market and why a globally diversified, academically based investment strategy can serve investors prudently rather than giving in to fear and uncertainty.
Understanding Tariffs and Their Impact on the Stock Market
Tariffs are essentially taxes imposed on imported goods and services. Governments use tariffs as a tool to encourage domestic production by making foreign goods more expensive. This strategy aims to protect certain local industries from international competition and, in theory, boost job creation at home. One of the key motivations for imposing tariffs is to address trade imbalances—particularly large trade deficits, where a country imports more than it exports. By making imports costlier and potentially less attractive, tariffs aim to reduce the gap and bring the trade deficit back to more sustainable levels.
However, this approach can have unintended consequences. While some domestic producers may benefit, consumers and businesses that rely on imported materials often face higher costs. Over time, this can lead to inflationary pressure and reduced purchasing power for households.
As of early 2025, the U.S. trade deficit remains substantial. In February 2025, the U.S. international trade deficit was $122.7 billion, with exports at $271.8 billion and imports at $342.2 billion.5 Despite multiple rounds of tariff measures in the past decade—particularly during the U.S.-China trade war (2018-2019)—many economists argue that tariffs alone have not significantly narrowed the deficit.
In short, while tariffs are a tool intended to rebalance trade, their real-world impact is complex, and the benefits are often unevenly distributed across the economy.
Historical Context: How Markets Have Previously Reacted to Tariffs
To gain a clearer perspective, it’s helpful to look at a historical instance of levied tariffs and their impact on the stock market. In one example, the Smoot-Hawley Tariff Act of 1930, high tariffs were imposed on over 20,000 imported goods; this is often cited as exacerbating the Great Depression due to retaliatory tariffs and reduced international trade.3
Historically, the United States employed high tariffs to shield its nascent industries from foreign competition. However, following World War II, there was a significant shift in U.S. trade policy. In 1947, the U.S. played a pivotal role in establishing the General Agreement on Tariffs and Trade (GATT), aiming to reduce trade barriers and promote international economic cooperation. This move towards trade liberalization contributed to a period of substantial economic growth and industrial expansion in the subsequent decades.6
While tariffs can offer temporary protection to specific sectors, they often lead to higher costs for consumers and may invite retaliatory measures from trading partners. The post-WWII experience demonstrates that reducing trade barriers, rather than imposing them, has been more effective in fostering long-term economic growth and stability.6
Why Panic Selling Can Be a Risky Response
Panic selling during times of market turbulence can be detrimental to long-term financial health. Reacting impulsively to short-term volatility often leads to selling assets at a loss, which can crystallize the effects of temporary declines into long-term losses.
Decades of stock market returns demonstrate how often declines can happen. For evidence, look at the largest intra-year declines for the Russell 3000 Index (U.S. stock market) in every year from 1979 to 2023. Those declines average -14%. However, 37 of the past 45 calendar years have ended with positive returns for the U.S. stock market. In addition, from July 1926 through the end of 2021, the CRSP U.S. Market Index declined at least 5% from its previous high 90 times, or a little less frequently than once per year. The median drop among these samples was -8.7%, and the median length of time it took for the market to return to its previous high was 62 trading days. Despite these events, the market has historically rewarded disciplined investors who stay the course.
The Importance of a Globally Diversified Portfolio
A globally diversified portfolio remains a key pillar of prudent investing. By allocating assets across a range of asset classes and geographic regions, investors can help reduce the impact of localized market disruptions—such as tariffs or economic slowdowns. Recent analyses indicate that while U.S. markets have experienced a prolonged period of outperformance when compared to international4, early trends in 2025 suggest that investors with exposure to international markets may be better positioned to navigate volatility and uncertainty.
Diversification in investor portfolios has well-known benefits, including the potential to benefit from some asset classes performing well while others aren’t. That’s been a silver lining for many so far in 2025. If we consider broad equity markets, exposure to markets beyond the U.S. has generally helped investors this year. It’s a short period, but those who held globally diversified portfolios will still likely be happy they did. It can be a healthy reminder to investors that global diversification still matters after an extended period of U.S. outperformance. These developments underscore the potential benefits of global diversification in enhancing portfolio resilience amid market fluctuations.
Leveraging Academic Investing Principles for Long-Term Success
Academic investing principles—such as Modern Portfolio Theory, Efficient Market Hypothesis, and the Fama-French Three-Factor Model—underscore the value of diversification, risk management, and disciplined portfolio construction. These frameworks do not advocate for market timing and stock-picking in favor of evidence-based investing, recognizing that markets are largely efficient and that prices reflect all available information.
The Three-Factor Model, in particular, highlights the importance of market exposure, company size, and value versus growth characteristics in driving long-term returns. By integrating these factors and maintaining broad global diversification, investors can build resilient portfolios that are structured to weather various market conditions, including those disrupted by tariffs or geopolitical shifts.
This disciplined, research-driven approach can help minimize emotional decision-making and speculative behavior, helping investors stay focused on their financial goals while managing risk more effectively over time.
Weathering the Storm with Clarity and Discipline
In a world where headlines shift daily—whether due to tariffs, inflation, or geopolitical unrest—it’s easy for investors to be swept up in fear or reactive decision-making. History shows that while market disruptions are inevitable, they are often temporary. What matters most is having a strategy that’s built for resilience.
Global diversification is more than just a buzzword—it’s a powerful tool for managing risk and capturing opportunity beyond any one market or economy. And in 2025, that’s proving to be more important than ever.
At Matson Money, we believe investors deserve more than guesswork or emotional investing. With our academically backed approach and commitment to education, we help investors stay focused on what can build long-term wealth. Through our structured portfolios and immersive investor education experiences, we empower families and advisors to stay disciplined, diversified, and confident—even in the face of uncertainty.
Because the American Dream is still possible—you just need a plan that’s designed to weather the storm.
- Tariffs rattle stock markets, but long-term impact is unclear. March 14, 2025. https://www.invesco.com/us/en/insights/tariffs-rattle-stock-markets-long-term-impact.htm
- Global equities outperform US stocks in 2025. March 3, 2025. https://www.considerable.com/global-equities-outperform-u-s-stocks-in-2025
- Smoot-Hawley Tariff Act. https://www.britannica.com/topic/Smoot-Hawley-Tariff-Act
- US Stocks have outperformed the world. History shows that success can be fleeting. Larry Swedroe. Jan 22, 2025. https://www.morningstar.com/stocks/us-stocks-have-outperformed-world-history-shows-that-success-can-be-fleeting
- International Trade in Goods and Services. Current Release: April 3, 2025. https://www.bea.gov/data/intl-trade-investment/international-trade-goods-and-services
- History of The General Agreement on Tariffs and Trade (GATT) October 29, 2024. https://worldofhistorycheatsheet.com/history-of-the-the-general-agreement-on-tariffs-and-trade-gatt/
DISCLOSURES:
This content is based on the views, opinions, beliefs, or viewpoints of Matson Money, Inc. This content is not to be considered investment advice and is not to be relied upon as the basis for entering into any transaction or advisory relationship or making any investment decision.
All of Matson Money’s advisory services are marketed almost exclusively by either Solicitors or Co-Advisors. Both Co-Advisors and Solicitors are independent contractors, not employees or agents of Matson.
Other financial organizations may analyze investments and take a different approach to investing than that of Matson Money. All investing involves risks and costs. No investment strategy (including asset allocation and diversification strategies) can ensure peace of mind, guarantee profit, or protect against loss.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS
This content includes historical performance information from various global stock market indices. Market performance information is included in this content solely to demonstrate the potential benefits historically associated with diversification of asset classes and does not represent or suggest results Matson Money would or may have achieved when managing client portfolios. Investors cannot invest in a market index directly, and the performance of an index does not represent any actual transactions. The performance of an index does not include the deduction of various fees and expenses which would lower returns.
FAMA/FRENCH FIVE FACTOR MODEL
Eugene F. Fama, Kenneth R. French, “The Cross-Section of Expected Stock Returns,” Journal of Finance 47, No. 2, (June 1992); Eugene F. Fama, Kenneth R. French, “Common Risk Factors in the Returns on Stocks and Bonds,” Journal of Financial Economics 33, No. 1, (February 1993); Eugene F. Fama, Kenneth R. French, “Profitability, Investment and Average Returns,” Journal of Financial Economics 82, No. 3 (December 2006); Eugene F. Fama, Kenneth R. French, “A Five-Factor Asset Pricing Model,” Journal of Financial Economics 116, No. 1 (April 2015);
Three Factor Model
Fama, Eugene F. and Kenneth R. French. “The Cross-Section of Expected Stock Returns,” Journal of Finance, 47, June 1992.
Efficient Market Hypothesis
Eugene F. Fama, “Random Walks in Stock Market Prices,” Financial Analysts Journal, September/October 1965.
Modern Portfolio Theory
Markowitz, Harry. Portfolio Selection: Efficient Diversification of Investments. New York. Wiley. 1959. Print.
