How The Stock Market Has Responded To Tariffs In The Past

Stock markets have been spooked by talk of a trade war between the US and China. The consensus view is that trade wars and tariffs are bad for economic growth and the stock market.

It’s not hard to see why experts think so. If US companies have their supply chains disrupted, they have to find alternatives to buying raw materials and goods from China. These alternatives are likely to be more expensive. If companies can not pass on the increased cost to the customer, then their profit margins are likely to shrink, which may negatively affect their stock prices.

If China retaliates with tariffs on US exports, US companies may become more expensive and less competitive in large markets that they currently sell to. This would have the effect of reducing the revenue these companies generate from sales and cutting into their profits, negatively impacting their stock prices.

Let's study the stock market in 1929 to see how US stocks responded to the passing of the Smoot-Hawley tariffs. The Smoot–Hawley tariffs were an act implementing protectionist ideas that were signed into law on June 17, 1930. The act raised tariffs on over 20,000 imported goods. Other countries responded by retaliating by imposing tariffs on US exports.

The chart below shows the Dow Jones industrial index from 1929 to 1931 and shows key events around the passing of the Smoot-Hawley Tariffs.

The Smoot-Hawley bill passed in the house on May 28, 1929, and the Senate on March 24, 1930. Short-term stock market reactions to both events were relatively mute. By the time the Senate had passed the bill, the stock market crash of October 1929 had occurred and the idea of protecting US manufacturers from foreign imports had become more politically pressing. However, by the time president Herbert Hoover actually signed the tariffs into law on June 17, 1930, the Dow Jones had dropped over 16% from its 60-day high in anticipation.

However, this 16% short-term price drop was a precursor to a much larger bearish market. After the tariffs passed US trading partners such as Canada and the Europeans retaliated; eventually leading to lower levels of trade between the US and its trading partners. To illustrate, trade between the US and Europe shrunk by over two thirds over the next 2 years. The stock market’s return over the next few years was dismal; the Dow returned -33% over the next 1 year and -81% over the next 2 years.

But were these negative returns solely driven by tariffs? By the time the Smoot-Hawley tariffs were passed into law the stock market crash of 1929 had already occurred. There are many reasons for the crash, many of which are outlined in our ultimate guide on the 1929 stock market crash. The Smoot-Hawley tariffs were implemented in an environment where banks were allowed to go out of business and monetary policy was too tight due to second order effects of being on the gold standard. These factors also contributed to a massive contraction in the economy, resulting in spiking unemployment and collapsing demand for goods and services. So while the tariffs may not have been the sole cause of terrible stock market performance, they certainly didn’t help.