The U.S. and China recently announced a trade agreement that reduces many of the trade barriers that worried financial markets since April. This 90-day deal lowers U.S. charges on Chinese products from 145% to 30%, while China’s charges on U.S. goods drop to 10%. Along with similar agreements with other countries and a new trade deal with the U.K., investors are feeling more optimistic that a long trade fight won’t happen. What does this changing situation mean if you’re investing for the long term?
Financial markets really don’t like uncertainty or unexpected bad news. When something concerning happens, markets often react to the worst possible outcome right away, then adjust as more information comes out. While the surprisingly large April 2 tariffs (extra charges on imported goods) caused markets to drop sharply, they’ve recovered quickly over the past few weeks.
Markets are now close to where they started the year and slightly higher than before the April 2 announcement. This pattern has happened many times before – recovery often follows once the situation becomes clearer. Recent events remind us again why it’s important to keep a long-term perspective when investing during uncertain times.
The U.S.-China agreement signals hope for a more permanent solution
The new trade agreement between the U.S. and China is good news because it removes a major source of market uncertainty. It sets the U.S. tariff on Chinese goods at 10% while keeping the 20% tariff related to the fentanyl crisis that was added earlier this year. While things are still developing, this agreement opens the door for a longer-term trade deal between the world’s two largest economies and lowers tensions. So, while tariffs are still higher than before, the worst-case scenario now seems less likely.
Looking back, recent events look similar to what happened in 2018 and 2019 during the first Trump administration. In both cases, the administration has used tariffs as a negotiating tool to try to get new trade deals, with the goal of reducing the U.S. trade deficit (when we import more than we export). Five years ago, this approach resulted in the “Phase One” trade agreement with China, the USMCA (United States-Mexico-Canada Agreement), and other deals.
These trade policies aim to accomplish several things: bringing back manufacturing jobs, protecting intellectual property (ideas and inventions), controlling immigration, and more. The key difference today is that the administration has threatened much higher tariffs than many investors and economists expected. Still, the recent trade deal with the U.K. suggests we might see similar patterns as before. That agreement sets a basic 10% tariff rate on U.K. goods, allows up to 100,000 imported cars at this rate, and makes exceptions for steel and aluminum.
The economy has stayed strong despite trade concerns
Of course, final trade deals with China and other countries aren’t complete yet, and daily news could continue to cause market ups and downs, especially if temporary tariff pauses expire. Markets have been so focused on tariffs because they can affect prices (inflation) and economic growth. This showed up in the first quarter’s GDP figure (a measure of economic output), which showed a small contraction as businesses rushed to buy imported goods before tariff deadlines. Having clearer information will likely help both consumers and businesses make better decisions.
In this environment, what positive factors exist? First, many economic indicators remain healthy. The latest jobs report showed the economy added 177,000 new jobs in April, better than the expected 138,000. The unemployment rate stayed at 4.2%, continuing a stable trend that began last May. The strong job market helps balance worries that tariffs and uncertainty might reduce consumer spending.
Meanwhile, inflation (rising prices) continues to slowly decrease toward the Federal Reserve’s 2% goal, with the latest Consumer Price Index showing prices increased 2.4% compared to a year ago. This improvement has been helped by falling oil prices, which recently hit four-year lows. Cheaper oil, partly caused by tariff-related market swings, helps lower costs for consumers and can boost the economy.
The recent U.S.-China agreement also reduces pressure for immediate changes to interest rates by the Federal Reserve (often called “the Fed”). Markets still expect the Fed to lower interest rates this year, but now predict only two or three cuts, possibly starting in July or September. The Fed, which recently kept rates between 4.25% and 4.5%, seems to be taking a cautious approach rather than reacting quickly to trade news, market movements, or economic data.
Markets often recover when you least expect it
While there are still many risks to watch, the past several weeks show how quickly the market story can change. By their nature, markets tend to prepare for the worst scenarios. During times of negative news and market drops, it’s hard to imagine that the market will ever recover. While understanding risks is always smart, it shouldn’t lead you to abandon your long-term investment plan.
The chart shows how market corrections (drops of 10% or more) have behaved since World War II. While the average correction sees prices fall by 14%, markets often recover in as little as four months. Most importantly, markets can bounce back when least expected, as we’ve seen following recent progress on trade talks. Investors who overreact to early signs of trouble may find themselves poorly positioned to meet their financial goals.
The bottom line? The latest U.S.-China trade announcement has reduced market uncertainty and worries about a recession. For long-term investors, this reinforces the importance of staying calm during market turbulence rather than making sudden changes based on short-term market swings.
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