U.S. stocks slipped on Tuesday amid a growth in the trade war caused by the US, where the US places new tariffs on Mexico and Canada.
The sale has largely overturned US stocks' profits posted after the November US presidential election.
President Donald Trump has placed a 25% tariff on goods imported from Canada and Mexico, and an additional 10% tariff on goods imported from China. Energy imports from Canada are taxed at a slower rate of 10%.
Following a 1.8% loss on Monday, Morning Star US Market Index By noon on Tuesday it fell another 0.7%. Stocks have fallen across Morningstar Style boxes, with small-cap stocks hit the hardest, with on average a loss of -2.1% by noon. Large blend stocks did their best, averaging just 0.8% losses.
The worst hit sector on Tuesday was the financials that saw the $55 billion financial select sector SPDR ETF XLF, which is as of noon, fell 3.2%. The technology sector weathered Tuesday's slump, with the $69 billion technology Select Select Sector SPDR ETF XLK losing just 0.3%. The S&P 500 fell 1.1%, while Nasdaq lost 0.5%.
The 10-year Treasury bond yields fell to 4.18% from around 4.24% on Monday, before changing little at 4.17% on Tuesday. While US government yields have risen amid stubborn inflation concerns, the slide into the trade war has led investors to the relative security of the bond market. When stocks shaking, bonds are better than the stock market.
Canada's European stocks fall
In Canada, the widely viewed S&P/TSX combined index fell 1.9% while open on Tuesday. Morning Star Canada Index A decrease of 2.1%. Canada's economy has already stepped in in recent months and could be hit hard by tariffs.
European stocks fell on Tuesday, slashing profits from the previous session and fell by car names that are most exposed to the US market. Stellantis Stlam, which has a key production base in Mexico, fell 8% in the afternoons in Europe, with BMW BMW down 6%, Mercedes-Benz MBG down 5%, and Volkswagen Bow 3 down 3%.
The additional weight for the sector was the revenue release from Continental Con, Germany's largest automotive supplier, on Tuesday morning. Morningstar analyst Rella Suskin says he “drawn the desolate picture of 2025.” The company is not expecting a recovery in car production this year.
Suskin believes that Volkswagen's relative outperformance could come from plans to open a Scout EV plant in the US next year.
Trump initially announced tariffs in early February, but he delayed their implementation after both countries said they would take steps to address his concerns. He says those efforts are insufficient now and tariffs will move forward.
“Given Trump's comments, tariffs seem more than a threat or a negotiation tool,” said Dominic Pappard, chief multi-asset strategist at Morningstar Investment Management. “The violent market sale confirms that at least some investors did not believe that tariffs would be implemented, at least not in their current form.”
Tariff uncertainty can lead to volatility
The uproar comes amid continuing concerns about the strength of the US economy, partly driven by concerns that new tariffs could halt economic growth and cause inflation. The market has been stuck in a holding pattern for weeks as investors waited for more clarity on US trade policies, but there were signs of a reborn spinning beneath the surface. Since the beginning of the year, investors have moved from growth and big technology (2024 winner) to value and international markets.
Pappalardo says investors need to prepare more choppies, and with tariffs being introduced now, “The conversation will soon be 1) 2) How will the affected countries react?” he thinks it's too early to tell, “that uncertainty is likely to lead to an increase in market volatility until some sort of solution is clearer.”
