When Tariffs Rise: Stocks, Bonds and Volatility

It’s only been a bit over a month for the reason that US presidential election, and analysts’ heads are already spinning in regards to the potential impact of trade policy. President-elect Trump has threatened quite a few tariffs, leaving researchers wondering which, if any, he’ll implement — and what consequences that might need for asset prices.

The overwhelming majority of educational economists oppose tariffs for a wide range of reasons. The most vital of those is that they assist the few on the expense of the various and are more likely to undermine long-term economic growth.[i]

Recent research suggests that the targeted tariffs in 2018 and 2019 had only a brief impact on financial markets.[ii] In one Freedom Street In the blog, New York Fed economists showed that large-cap U.S. stocks reacted negatively to tariffs imposed throughout the first Trump administration on the time of their announcement, but not before. [iii] Then when the tariffs hit, stocks fell, at the least temporarily. Specifically, the researchers found that U.S. stocks fell on the day the tariffs were announced (tariff day) and that this variation was robust to other economic news that might plausibly impact stock prices.

In this blog, I extend parts of their evaluation to small-cap stocks within the US and small-cap stocks in major foreign markets using an analogous but simpler approach. I specifically show the change in response to tariffs on a safe-haven asset (the 10-year US Treasury note) and expected volatility (as represented by the VIX). In addition, I test the claim that average returns on tariff announcement days actually differed from those on non-tariff announcement days.

I confirm that the tariff announcement days were indeed bad for stocks at home and abroad. Safe havens (represented by the US Treasury with a 10-year term) protected capital, just as an investor would have hoped. Furthermore, the tariffs don’t appear to have had an enduring impact on expected volatility in US stock markets. After a tariff shock, things quickly return to the extent before the tariff was introduced.

It is unlikely that these responses occurred by probability – but we cannot rule out the opportunity of bias.

My evaluation is carried out in RThe data used is offered from Yahoo Finance and FRED. Tariff data comes from the New York Fed blog.[iv] For those that want to copy or modify the evaluation, R code is offered online.

What happened on tariff day?

Table 1 shows the one-day price-yield percentage change by tariff day for the S&P 500 index (sp_chg), the Russell 2000 index (rut_chg), the FTSE 100 index (ftse_chg), the DAX index (dax_chg). the Nikkei 225 Index (nikkei_chg) and the Hang Seng Index (hsi_chg) on ​​the ten days Tariffs were imposed. The VIX (vol_chg) 10-year US Treasury (ten_chg) uses level differences. On some tariff announcement dates, certain foreign markets were closed, during which case the returns were “NA”.

New York Fed researchers found that tariff announcements coincided, on average, with falling stock markets, rising 10-year Treasury prices and increased expected volatility.

Table 1. What happened when the 2018 and 2019 tariffs went into effect?

Source: Yahoo Finance, FRED

Impact significance

The changes in Table 1 look like large, but they’re as a consequence of probability. To support the major finding that tariffs are bad for stocks, at the least within the short term, I estimate models of the shape:

Daily Change = Constant + Tariff + Error, where Tariff is a dummy variable using easy linear regression. The results of this mean comparison are shown in Table 2.

Estimates of the impact of tariffs are shown in the primary row (tariff), while average returns on days when tariffs usually are not in effect are shown within the second row (constant). Standard errors are in parentheses below each estimate, and significance is indicated by asterisks using the standard convention as explained within the table note.

Of course, the means within the last row of Table 1 correspond exactly to the tariff coefficient plus constant estimates in Table 2. We didn’t must run regressions to estimate the mean effect. Rather, the worth of this exercise lies within the error estimates that allow us to find out significance.

Table 2. Regression results.

The impact of tariff announcements on large-cap stocks is very significant (t-statistic = 3.4), while the impact on small-cap stocks is less pronounced (t = 2.5). The accuracy of estimating foreign markets versus tariff announcements is mixed. Only the response of the DAX was estimated with some accuracy (t = 2.6). Interestingly, the returns using the Hang Seng Index usually are not statistically different on the tariff announcement days. These days, tariffs look like hurting stocks from the U.S. and other developed countries greater than those from China. Meanwhile, the responses of secure assets (t = 2.9) and volatility (t = 3.4) to tariffs have the expected sign and are reasonably strong. (Technical note: Using “robust” standard errors doesn’t change these conclusions.)

The skeptical reader should have doubts about causality. My easy model has no controls. I even have not attempted to rule out other possible influences on the dependent variable. However, New York Fed researchers did this – but just for US stocks – and it didn’t change their conclusions.

Because testing the robustness of my results to other economic developments would transform this from a brief blog post right into a full-scale research project, I depend on their finding that independent market-moving developments didn’t also occur on the tariff days, so a more rigorous treatment is required future research.

Tariff volatility disappears

Readers may recall that stock markets were weak in 2018 and quite strong in 2019. This suggests that, broadly speaking, the negative impact of tariffs akin to those imposed during this era could also be just an outlier. If we use the sturdiness of the VIX change as a measure of tariff disruptiveness, this appears to be the case.

Chart 1 shows VIX levels in 2018 and 2019, with tariff days indicated by red triangles and non-tariff days indicated by black dots. Table 3 shows the extent of VIX someday before the tariff day (column 2), then on the tariff day (column 3), after which three, five, and ten days after the tariff day (columns 4 to 7).

A fast visual inspection of Chart 1 shows that VIX peaks typically reverse quickly after tariff days. Table 3 allows a more precise conclusion: On 70% of tariff days in 2018 and 2019, the VIX returned to roughly pre-tariff levels the next week.

Finally, and more specifically, I checked the persistence (autocorrelation) of the VIX values ​​and every day changes and located no difference on average on or around tariff days in comparison with non-tariff days. The impact of tariff announcements on VIX is temporary.

Chart 1. VIX level, 2018 to 2019.

Source: Yahoo Finance

Table 3. VIX before and after duty.

Source: Yahoo Finance, writer’s calculations

All Sound and Fury, with one caveat

On the day the tariffs were imposed, returns on most stock markets were, on average, significantly lower than on other days. And while the strength varies, the difference is critical in most markets. At the identical time, the worth of 10-year government bonds rose on customs days: high-quality bonds served their purpose. However, the general impact of the tariffs utilized in 2018 and 2019 appears to be short-lived.

Although customers expect us to follow every tariff tweet, we will perhaps take some comfort from the proven fact that the tariff types introduced in 2018 and 2019 haven’t played a significant role in capital market developments in the long run. However, the impact of broader tariffs will not be so benign.

[i] See for instance https://www.cato.org/publications/separating-tariff-facts-tariff-fictions#how-has-united-states-used-tariffsAnd https://www.aeaweb.org/articles?id=10.1257/jep.33.4.187

[ii] https://libertystreeteconomics.newyorkfed.org/2024/12/using-stock-returns-to-assess-the-aggregate-effect-of-the-us-china-trade-war/

[iii] Ibid

[iv] Ibid