This article explores the connection between President Trump's tariffs and the stock market, explaining key concepts and analyzing the potential economic impact.
What is the Stock Market?
- Stocks: Units of ownership in a company, allowing the public to invest.
- Shares: Individual units of stock.
- Investors: Individuals who purchase shares, becoming part owners of the company.
By investing in a company, you hope its stock value will increase, allowing you to sell your shares for a profit.
Stock Exchanges
A stock exchange is a marketplace where investors buy and sell stocks. These exchanges can be physical locations with electronic trading or entirely electronic, such as:
- New York Stock Exchange (NYSE)
- NASDAQ
- Tokyo Stock Exchange
- London Stock Exchange
- Hong Kong Stock Exchange
The stock market represents the sum of all stock exchanges, reflecting overall buying and selling activity.
Stock Indices
A stock index measures the performance of the stock market by tracking a collection of stocks and computing their overall value. Key indices include:
- Standard & Poor's 500 (S&P 500): Tracks 500 leading U.S. companies.
- Dow Jones Industrial Average: Includes 30 prominent companies.
- NASDAQ Composite: Encompasses nearly all companies listed on the NASDAQ exchange.
What are Tariffs?
Tariffs are import taxes paid by companies importing goods into the U.S. President Trump has advocated for tariffs to incentivize domestic manufacturing and increase federal revenue.
Trump believes tariffs will address trade deficits and level the playing field for American companies.
The Impact of Trump's Tariffs on the Stock Market
Stock prices are determined by supply and demand. Trump's trade war is a major event influencing investor expectations and market behavior.
When a company initially goes public (IPO) it's stock prices are determined by investment bank. Afterwards the prices tend to fluctuate based on supply and demand. If more investors want to buy stock(high demand) than sell it(low supply), the price tends to rise and if more investors want to sell a stock(high supply) than buy it(low demand), the price tends to fall.
When a buyer and seller agree on a transaction price, that becomes the new price of the stock.
Consumer staples and cyclical purchases, like autos and air travel, are particularly vulnerable to stock market losses when economic uncertainty rises.
Bear Market vs. Bull Market
- Bear Market: A stock index declines 20% from its peak, indicating a sustained downturn.
- Bull Market: A stock index rises 20% above its recent low, reflecting optimism.
Bear markets can signal potential recessions, although not always. The most immediate impact is on individuals needing to sell stocks quickly, potentially at reduced prices.