In just a matter of weeks, President Donald Trump’s tariff threats have gone from what many believed to be just saber-rattling to a full-blown trade war with the United States’ closest trading partners: Canada, Mexico, and China.
Last Tuesday, the Trump administration imposed 25% import taxes on all goods from Mexico, 25% tariffs on non-energy goods from Canada with a 10% rate on energy products. It raised the tariff on all goods from China from the 10% rate it assessed a month ago to 20%. This week, a 25% tariff is supposed to go into effect on all aluminum and steel imports, and the president has talked up other tariffs, including on agricultural products and foreign cars, and plans to reciprocate tariffs that the U.S. is charged from other countries. A few days later, Trump temporarily paused some of the tariffs against Mexico and Canada until April 2.
Despite some of his cabinet members trying to frame the tariffs as a negotiating tactic, Trump showed no signs of softening his stance in his address to Congress last Tuesday night and even acknowledged there could be “a little disturbance” and “an adjustment period” for the economy.
Investors are understandably jittery about the impact of tariffs. Through Monday and Tuesday, as it became clear that at least some of the proposed tariffs would go into effect, the S&P 500(SNPINDEX: ^GSPC) fell a total of 3%, giving up all of its post-election gains.
There’s already evidence in macro-level data that the tariff threat is having an impact on economic growth. On Wednesday, payroll processor ADP reported that private employers added just 77,000 jobs in February, far below expectations, and the February ISM manufacturing survey indicated that the tariff threat was leading to price increases and causing some businesses to pause orders.
While it’s unclear what will happen with the tariffs going forward, the volatility around them seems likely to continue — and for investors that can present an opportunity.
Image source: Getty Images.
The tariffs could do real damage to the U.S. economy, potentially contributing to a recession. Trump could pull back on them depending on how negotiations play out and the economy could recovery. It’s a difficult thing to predict, but as stock prices have fallen, long-term investors are getting attractive prices on stocks that shouldn’t be impacted by tariffs over the long term, regardless of what happens in the short term.
In other words, it’s a good time for investors to make a watch list for stocks they’d like to buy if the price falls.
One example of a growth stock that’s become more attractively priced amid the recent noise around tariffs is Cava Group (NYSE: CAVA), the Mediterranean fast-casual chain that is growing quickly and posting strong profits. Cava stock was down 11.5% last week and has fallen 44% from its peak just a few months ago, even though it reported blowout fourth-quarter results earlier this month.
There’s also a good argument for buying a stock like Nvidia (NASDAQ: NVDA), whose competitive advantages can outlast a trade war, and whose stock is down roughly 25% from its recent peak in part on concerns that a trade war could cool off global economic growth. Following that pullback, Nvidia stock now trades at a forward price-to-earnings ratio of just 26, in line with the S&P 500.
Similarly, Taiwan Semiconductor Manufacturing (NYSE: TSM), the world’s largest chip manufacturer, also looks like a steal now, trading at a price-to-earnings ratio of 27. It also just announced an additional $100 billion investment in new foundries in the U.S., which should help insulate it from some of the disruption around tariffs.
President Trump also cheered the recent pullback in interest rates in his address to Congress, and economic uncertainty could push Treasury yields lower in a flight-to-safety move. Falling yields tend to be good news for dividend stocks as they make high-yield dividends more attractive by comparison, and that could favor utility stocks like Dominion Energy or low-risk real estate investment trusts (REITs) like Realty Income.
It’s important for investors to remember that the tariffs are a fluid situation, and things could change quickly. For example, last Wednesday, President Trump delayed tariffs on cars from Canada and Mexico for a month after talking with executives from Ford Motor Company, General Motors, and Stellantis.
Though Trump seems likely to continue to use trade policy as a cudgel, it’s a mistake to try to predict the exact details of tariffs or the specific winners and losers, especially given how fast the news can change. Investors are better off focusing on the long-term opportunity here and buying high-quality stocks as they fall on short-term concerns.
Over the long term, those companies are unlikely to be affected by tariffs, and they should overcome any temporary headwinds from the trade war.
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Jeremy Bowman has positions in Dominion Energy, Nvidia, Realty Income, and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Nvidia, Realty Income, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Cava Group, Dominion Energy, General Motors, and Stellantis. The Motley Fool has a disclosure policy.
