After peaking at nearly 45,000 points in early February, the Dow Jones Industrial Average sank to 36,645 on April 8. The Dow then staged a remarkable 3,000 point rally on April 9 following President Trump’s 90-day pause on implementing his tariffs. The Dow is at 40,000 points as of writing this column, which is about halfway between its early February high and its April 8 low. Why is the stock market reacting so strongly to tariffs?
It is important to note that the stock market reaction we are seeing is nothing new. It is an easily predictable consequence of significant tariffs. The last substantial tariffs to be levied were through the Smoot-Hawley Tariff Act in 1930. Back then, presidents did not have the ability to set tariffs unilaterally. Tariffs had to be passed by the House of Representatives, the Senate, and signed into law like any other piece of legislation. During his 1928 Presidential campaign, Herbert Hoover promised to protect farmers from foreign competition using tariffs on agriculture imports. The U.S. Constitution requires all bills originate in the House. To win majority support in the House, the tariff bill that emerged levied tariffs on many more industries than agriculture. The enlarged tariff bill passed the House on May 28, 1929 but appeared dead in the freer trade Senate. However, on October 21, 1929, 16 Senators switched their vote from yes to no, making passage in the Senate imminent. On that day, the Dow began its infamous crash.
On the surface, tariffs appear to protect U.S. jobs but in fact, do the opposite.
As is the case with many bills, there were differences between the House and Senate versions that had to be ironed out in a reconciliation committee. It appeared this effort would fail, so the Dow regained almost all its losses by spring 1930. However, in June 1930, a unified bill emerged from reconciliation and was signed into law by President Hoover that month. The Dow resumed its crash and would not recover until the mid-1950s.
The reason the stock market reacts negatively to tariffs is that the idea they protect U.S. industry is largely a myth. Tariffs hurt U.S. manufacturers just as they hurt consumers. Consider the Top 10 list of goods imported to the U.S., which are: machinery, electrical machinery, vehicles, fuels, pharmaceuticals, medical equipment, furniture, precious metals and chemicals.
Only three on this list (vehicles, pharmaceuticals and furniture) are consumer goods. The rest are raw materials used to manufacture final goods in the U.S. Tariffs thus increase the cost of producing goods for U.S. companies, which is reflected in higher prices for consumers and lower profits – hence, the stock market decline.
Additionally, other countries will likely implement tariffs on U.S. exports in retaliation for U.S. tariffs on their exports. This occurred after Smoot-Hawley and already has occurred after these recent tariffs. This closes foreign markets to U.S. exports, which totaled $2 trillion in 2024, further hurting U.S. businesses. Thus, on the surface, tariffs appear to protect U.S. jobs but in fact, do the opposite.