Stocks Fall as New Tariffs on Canada, Mexico Take Effect

US stocks fell Tuesday amid a growing trade war sparked by the United States placing new tariffs on Mexico and Canada.

At the worst of Tuesday’s declines, US stocks nearly reversed the gains posted after the US presidential election in November.

President Donald Trump levied 25% tariffs on goods imported from Canada and Mexico, along with an additional 10% tariff on goods imported from China. Energy imports from Canada will be taxed at a lower rate of 10%.

Following a 1.8% loss on Monday, the Morningstar US Market Index slipped another 1.2% on Tuesday. All nine of the Morningstar Style Boxes fell on Tuesday, with the Morningstar US Mid Cap Broad Value Index down the most, falling 2.2%. Large growth held up the best with the Morningstar US Large Growth Index sliding by just 0.6%.

The worst-hit sector on Tuesday was financials, with the Morningstar US Financial Services Index down 3.5%. Tech did the best, with the Morningstar US Technology Index slipping just 0.1%. The S&P 500 fell 1.2% and the Nasdaq Composite Index fell 0.4%.

The yield on the 10-year Treasury note fell in early trading Tuesday but rose as the day went on, hitting 4.25%, up from 4.16% at Monday’s close.

While US government yields have been rising amid worries about stubborn inflation, the slide toward a trade war has sent investors to the relative safety of the bond market. With stocks faltering, bonds have been outperforming the stock market.

Canadian, European Stocks Fall

In Canada, the widely watched S&P/TSX Composite Index fell 1.89% Tuesday, and the Morningstar Canada Index was down 1.75%. The Canadian economy, already faltering in recent months, could take a significant hit from the tariffs.

European stocks declined on Tuesday, erasing the previous session’s gains, led lower by the automotive names most exposed to the US market. Stellantis STLAM, which has a significant production base in Mexico, fell the most, down 8% in the European afternoon, while BMW BMW was down 6%, Mercedes-Benz MBG down 5%, and Volkswagen VOW3 down 3%.

Tariff Uncertainty May Bring Volatility

Trump initially announced the tariffs in early February, but he delayed their implementation after both countries said they would take measures to address his concerns. He now says those efforts were insufficient and the tariffs will go forward.

The tumult comes amid ongoing worries over the strength of the US economy, partly fueled by concerns that new tariffs could dent economic growth and stoke inflation. Markets have been stuck in a holding pattern for weeks as investors waited for more clarity on US trade policy, though there have been signs of a nascent rotation under the surface. Since the beginning of the year, investors have moved away from growth and Big Tech (2024’s winners) toward value and international markets.

Pappalardo says investors should prepare for more choppiness, and with the tariffs now in place, “the conversation will quickly shift to 1) How long will they remain in place? and 2) How will the affected countries react?” He thinks it’s too soon to tell, and “that uncertainty will likely lead to elevated volatility in markets until some resolution becomes more clear.”