Tariffs have shaken the markets - how worried should we be?

The stock market is a crucial part of the economy where people buy and sell shares of companies. Recently, there has been a significant decline in stock markets around the world, and this has raised concerns among investors and the general public. The decline is largely attributed to the United States imposing new tariffs on goods imported from other countries. This sudden change has led many to question whether we are witnessing a stock market crash. A stock market crash is typically defined as a drop of more than 20% in stock prices over a short period, such as a single day or a few days. For instance, on October 19, 1987, known as Black Monday, the US stock market experienced a staggering loss of 23% in just one day. Similarly, during the Wall Street Crash of 1929, the market lost over 20% of its value in two days, leading to the Great Depression. In contrast, the current situation shows that the US stock market has lost approximately 17% of its value since its peak in February and is down about 2% compared to this time last year. The UK stock market, represented by the FTSE index, has also seen a decline, although not as severe. This is partly due to the fact that the UK market closes earlier than the US market, often resulting in it adjusting to US market movements the following day. The recent declines in stock markets are the most significant we have seen since the panic caused by the Covid-19 pandemic in early 2020. A decline of 20% from a peak is often referred to as a bear market, indicating that the market is more likely to continue falling than to recover. We are currently approaching this bear market threshold. So, how does this situation affect individuals? While some people own stocks directly, most individuals are exposed to the stock market through their pension plans. There are two main types of pension plans: defined benefit schemes, which guarantee a fixed income upon retirement, and defined contribution plans, where the value of the pension pot fluctuates with the stock market. Although defined contribution plans may seem more vulnerable to market downturns, it is important to note that not all contributions are invested in stocks. A significant portion is allocated to safer investments, such as government bonds. These bonds often increase in value when stock markets decline, as they are considered a safe haven for investors. This means that the rise in bond values can help offset some or all of the losses in stocks, depending on how an individual's pension savings are allocated. Those closer to retirement typically have a higher percentage of their pension invested in bonds, making them less susceptible to stock market fluctuations. Historically, there have been numerous instances of stock market declines since the Wall Street Crash, but over the long term, stocks have proven to be a solid investment. Pension savings are generally viewed as a long-term commitment. The question remains: does this situation matter? Yes, it does. The value of a company's stock reflects how profitable investors expect that company to be in the future. A declining market suggests that investors believe many companies will experience reduced profits. The recent tariffs imposed by President Trump are anticipated to increase prices, decrease demand, and ultimately lower profits for companies. This could lead to a decrease in company valuations and may prompt businesses to cut back on investments and jobs. Therefore, the real concern here is not solely about the value of individual pensions but rather the overall health of the economy in which we live and work. Significant drops in the stock market often signal the potential for an economic downturn, which poses a greater risk than the fluctuations in pension values. Nevertheless, this moment is critical for the global economy, and it is essential to monitor the situation closely.