Global Stock Market Shakeup: Assessing the Impact of Trump’s New Tariffs

 

On February 3, 2025, global stock markets experienced significant declines due to fears of a trade war following the announcement of new tariffs by the U.S. government. Investors were caught off guard by President Donald Trump’s decision to impose steep tariffs on Canada, Mexico, and China, triggering early market sell-offs before some recovery. The White House later confirmed that tariffs on Mexico and Canada would be delayed, helping ease losses.

Despite Trump’s long-standing threats of a 25% tariff on Canada and Mexico, markets had largely dismissed them as negotiation tactics. However, with the administration also announcing a 10% tariff on China, investors were forced to reassess, with potential tariffs on Europe and a postponed tariff for Mexico and Canada still up in the air.

The market has largely recovered from the fall, but it is interesting to assess the performance of global stocks on that day, to help us understand which countries or sector will be hit the hardest and which countries will fare the best.

The U.S. dollar surged to a two-year high of 109, while retail and auto stocks, which are sensitive to trade disruptions, declined. Nasdaq futures dropped 3% pre-market, but Trump’s announcement delaying Mexican tariffs helped prevent a major sell-off when markets opened.

In Asia, Taiwan’s stock market fell 5%, making it the worst performer, while India declined modestly by 0.4%. China and Mexico were closed for holidays, limiting a full assessment of market reactions to the tariffs. Taiwan’s sharp decline was driven by concerns over potential 100% tariffs on Taiwanese semiconductors, a move that would severely impact TSMC, which produces 95% of the world’s advanced chips. Such tariffs would also disrupt major clients like Apple, which accounts for 25% of TSMC’s revenue, and NVIDIA, which contributes 11%. However, Apple CEO Tim Cook’s close ties with Trump could lead to behind-the-scenes negotiations that might mitigate the impact.

Meanwhile, NVIDIA dropped 4% in pre-market trading on February 3, following a 16% plunge the previous week. Fears over China’s AI advancements, particularly the release of the DeepSeek AI model, have heightened concerns about growing competition despite China’s limited funding and chip power. Given the recent surge in AI-related semiconductor stocks, valuations have become stretched. If Trump’s tariffs materialize, they could reduce future revenue estimates and lead to steeper losses in tech stocks. Considering our strong gains from the AI trend, it may be prudent to take some profits on our technology allocation at this stage. 

Portfolio Strategy and Portfolio adjustment

In my annual newsletter, I predicted a chaotic stock market driven by the unpredictable nature of Trump’s policies, and the ongoing tariff episode is a clear example of what we can expect in the coming years. The market drops sharply in response to unexpected policy announcements, only to rebound quickly when Trump reverses course and claims victory in bringing "justice" to countries he believes have taken advantage of the U.S. However, despite these reversals, the 10% tariffs on China have been implemented, proving that not all of Trump’s threats are empty.

This volatility presents investment opportunities, but it also requires us to adjust our portfolio to mitigate potential risks. Our first move is to take profits and shift towards a more conservative allocation, adjusting from an 80/20 equity portfolio to a 70/30 mix. We are also reducing our U.S. equity exposure and reallocating funds into U.S. short-duration bonds to prepare for the potential escalation of a tariff war, which could lead to a more inflationary environment. The U.S. dollar is likely to perform well under these conditions, and short-duration bonds provide flexibility to adjust quickly if inflation pushes interest rates higher.

Additionally, we are rotating out of global technology funds and into global finance funds, as we expect banking and financial stocks to benefit from stable or slightly lower interest rates. The ongoing post-COVID recovery is improving employment and investment conditions, following multiple rounds of layoffs between 2020 and 2023. As businesses resume hiring and raise capital, banks stand to gain, a trend already reflected in the strong performance of banking and finance stocks in 2024.

Finance stocks began outperforming the S&P 500 late last year, and it seems that the trend is poised to continue, with positive earnings from the finance sector. Meanwhile, the technology sector’s weight in the S&P 500 has reached an unprecedented 40%, a level that may soon begin to reverse. As investors take profits, we could see funds rotating into other sectors, such as finance and U.S. small-cap companies, which could benefit from this shift.

There will be a portfolio rebalancing trade coming your way that will affect all the Cash, SRS and CPF-OA portfolio. Do watch out for the trade alert which I will start implementing shortly after publishing this newsletter.

Portfolio Performance

The portfolio returned a positive return with Cash +0.41%, CPF-OA +0.88%, SRS +0.87%. The portfolio performed well thanks to the positive market sentiments of the pre-Trump administration.. before the chaos started in the later part of the month. Nevertheless, we have to remember that Trump is a economy oriented president and he will try to maintain his slogan of "Making America Great Again" with the economy always at the top of his mind. I will continue to monitor the situation and will not hesitate to take a more conservative stand on the portfolio allocation should the winds of fortune starts to turn.

You can download the fund factsheet from this link.