During his Tuesday night address to Congress, President Trump acknowledged his barrage of tariffs might cause “a little disturbance.” But with the stock market tumbling this week in reaction to his import duties, workers with 401(k) plans may wonder about how much that disturbance could affect their retirement savings.
The S&P 500 has lost about 3% of its value since Friday, with Wall Street tumbling on Monday and Tuesday after Mr. Trump decided to move forward with 25% tariffs on nearly all goods imported from Mexico and Canada, and an additional 10% on Chinese imports. The stock index regained some ground on Wednesday, rising 21 points, or 0.4%, to 5,799 in afternoon trading.
According to Wall Street analysts, the market reaction reflects investor concerns that a trade war could crimp U.S. economic growth and reignite inflation, putting pressure on U.S. consumers who are already financially strained after grappling with several years of elevated price increases. Some recent economic data also points to souring outlooks from consumers and businesses, with both groups now expecting higher inflation in the face of Mr. Trump’s new tariffs.
With uncertainty on the rise, employees exposed to stocks through their retirement plans should brace for more investment volatility, experts say.
“There is evidence that a cooling in the economy is underway,” Adam Crisafulli, an analyst and founder of Vital Knowledge, told CBS MoneyWatch. “U.S. equities are bearing the brunt of what we’re seeing in the U.S. economy right now.”
The Trump administration has also sometimes sent mixed messages about its tariff plans, with Commerce Secretary Howard Lutnick on Tuesday night saying the administration might “modify the tariffs somewhat.”
Those mixed signals add to the challenges facing businesses in deciding their strategy, experts say. Because tariffs are paid by U.S. businesses on goods they import from other nations, some companies are uncertain about the costs they’ll face moving forward under the Trump administration, Crisafulli said.
“I look at tariffs as a corporate tax,” he said. “Imagine if corporate tax rates were set in this chaotic of a fashion — it would create a lot of hesitation among companies. They don’t know what the ground rules will be.”
Walmart executives, noting that the U.S. is entering what they characterized as “an uncertain time,” said last month that consumers are paring their spending, while Target on Tuesday said costs from tariffs could put “meaningful pressure” on the retailer’s profits. Such caution is also fueling market volatility, experts said.
“Uncertainty around the scope and implementation of tariffs is high,” investment firm BlackRock said in a March 5 note to investors. “In markets, we think U.S. equities could come under pressure in the next few months as investors seek additional compensation for these risks.”
How could this impact your 401(k)?
While investors spooked by the roller-coaster stock swings might be tempted to exit the market, that’s generally a losing strategy, Crisafulli said. Timing the market, or attempting to buy and sell stocks to capture gains and avoid losses, is almost impossible to execute and typically leads to financial losses and lost opportunities, Charles Schwab research has found.
The strategy is almost always doomed to fail because investors don’t know when to get back into the market to capture the rebound, while the stock market has historically always recovered even from major setbacks. For instance, investors who sold during the March 2020 rout that followed the eruption of COVID-19 around the U.S. and failed to re-enter the market that year could have missed out on the rebound, with the S&P 500 gaining 15% by the end of December.
For most investors with a 401(k) plan, sticking tight and avoiding checking your balance each day may be the best strategy for coping with volatile periods, experts say.
“Your 401(k) should be on autopilot, and you don’t look at day-to-day volatility,” Crisafulli said. “I don’t think people should make dramatic changes with their 401(k)s.”
Still, investors may want to examine their asset allocation and shift to investments that could provide more protection in the face of a possible global trade war, researchers note. For instance, automobile companies could be hard-hit by the Trump administration’s tariffs, BlackRock notes, given that U.S. automakers import many components from Mexico and Canada.
Restaurants and grocery companies could also feel the impact of the new tariffs, as U.S. food costs could increase by 3% due to the higher import duties, BlackRock noted.
“On the other hand, financials and health care services may be relatively insulated, since these sectors have minimal exposure to imported goods,” the wealth management firm noted.
On Tuesday, Mr. Trump vowed that his tariffs “are about making America rich again and making America great again.” Some of his goals in implementing the tariffs are to bring about a resurgence in U.S. manufacturing by convincing companies to move factories to the U.S.
While that could take months or even years to pan out, investment experts say it’s also important to keep a long-term view on the U.S. economy.
“It may be hard for investors to believe, but there is more to market volatility than reacting to the latest Trump executive action,” Michael Arone, chief investment strategist at State Street, wrote in a new report.
Despite recent data that suggests the U.S. economy is slowing, “an economic growth scare is not the same thing as a recession. And the economic environment remains respectable. U.S. real GDP is likely to expand in the first quarter,” he added.
Given that the economy is continuing to grow, the labor market remains strong and inflation is still cooling, it’s important to “differentiate between signal and noise,” Arone said.
“And, rightly or wrongly, the Trump administration uses the economy and stock market as barometers for its success,” he added. “They won’t purposefully harm the economy or the bull market.”
