Opinion: Tariffs’ impact on market volatility

Richard Baker

Our dog usually gets in the back of my truck on the tailgate steps, but if I have a trailer on, she has to walk from the trailer to the truck on a mesh metal ramp. She would just look at me like I was crazy. She hated uncertainty, and it seems investors hate uncertainty as well.

Stocks fell sharply on March 3 and 4 after President Donald Trump’s tariffs on Canada and Mexico took effect. These latest tariff headlines also woke up the market’s fear gauge.

Wall Street’s fear gauge, the Cboe Volatility Index (VIX), an options-based indicator, spiked to 24, up from this year’s low of 14 on Valentine’s Day. The VIX measures volatility in the S&P 500 and is at its highest level since Dec. 18, when the Federal Reserve announced its wait-and-see stance on interest rates leading to a stock selloff.

Trump’s tariffs and trading partners’ retaliatory tariffs are rattling markets. On March 4, the Dow Jones was negative 1.6%, or 670 points, and the S&P 500 fell 1.2% to close below its Election Day level. The technology-heavy Nasdaq Composite was nearly in correction territory and is down more than 10% from its last high on Dec. 17.

Volatility is picking up in the stock market, putting significant pressure on stocks that already seem overvalued. In response, investors are buying defensive options contracts to protect themselves against a market downturn. This is a notable shift in investor behavior towards a risk-averse tone.

The current VIX level of 24 is considered high since the normal levels are between 12 and 20 – but it is still well below the peaks we see during times of market stress. For example, the VIX was nearly 40 during the global markets collapse last August.

The geopolitical and economic implications of these tariffs and the uncertainty surrounding their implementation could challenge the market going forward. Most investors consider these tariffs to be short-term, where Trump shows the world that he will back up his threats.

Despite the probability of these tariffs being temporary, they are still creating significant uncertainty for investors. Their impact on market volatility and a change in investment decisions is undeniable.

I have been telling my clients for weeks that the market will probably experience bumps over the next few months, which is why, on Feb. 18, one day before the market peak, I moved my clients to more conservative positions and implemented downside protection. If you have a good investment plan and stick to it, you could possibly retain last year’s earnings.

Our dog could be pretty stubborn. She wouldn’t walk on the ramp because she could see through it to the ground. So, I eventually put a board down and she happily crossed. She preferred putting her feet down on something she trusted. I think investors feel the same way about their money.

Richard Baker, an accredited investment fiduciary, is the CEO and executive wealth adviser at Fervent Wealth Management LLC in Springfield. He can be reached at
richard@ferventwm.com.