Investors finished Monday relieved that Trump’s tariffs on Mexico and Canada are on hold, but a 10% levy on goods imported from China still takes effect Tuesday.
By Hank Tucker and Stephen Pastis, Forbes Staff
Donald Trump appeared triumphant Monday after extracting deals from Canada and Mexico to increase their border security efforts in exchange for a pause on tariffs against imports from those countries that was slated to take effect Tuesday, giving the stock market a reprieve as well. But investors should be prepared if that relief is only temporary.
Trump’s weekend announcement that 25% tariffs would be imposed on all goods important from Canada and Mexico and imports from China would be taxed at 10% rattled markets, with the S&P 500 index opening the day down 2%. But when Mexico agreed Monday morning to send 10,000 troops to the border to stop illegal immigration and the flow of fentanyl into the U.S., Trump agreed to at least a 30-day pause on tariffs for their imports, and stocks recovered most of their losses. The S&P 500 finished the day down 0.8% and erased those losses after hours when Canada’s Justin Trudeau announced a $900 million plan to strengthen its border with additional personnel and helicopters as well.
Mission accomplished for now, but the tariffs on China are still taking effect on Tuesday, and those apparent successes may embolden Trump to continue using the threat as an intimidation tactic, and he said over the weekend he expects to impose tariffs on the European Union “soon.”
“What’s happened with Colombia and Canada and Mexico primarily have reinforced to President Trump that this is an effective negotiating tool,” says Adrian Helfert, CIO of alternative and mutli-asset portfolios at Westwood, a Dallas-based firm managing $17.7 billion. “None of us should be surprised.”
To prepare, Helfert recommends finding protection in small and mid-sized businesses that have a more domestic focus, which are still broadly undervalued relative to large caps. He has his eye on U.S. defense stocks like Kratos (KTOS), a manufacturer of military electronics and drones, anticipating that defense spending will be mostly spared from Trump’s threatened cuts to the federal budget. Another area of the market he’s bullish on is regional banks like Texas-based Cullen/Frost Bankers (CFR), which will benefit from decreased regulatory costs and more M&A activity and don’t have a large international presence.
Sam Stovall, chief investment strategist at CFRA Research, says investors still have reason for optimism across the market, citing the “January barometer” that stocks typically have strong calendar years when they rise in January. The S&P 500 was up 2.7% in the first month of 2025.
“I think that even President Trump does not believe that a trade war is in the U.S.’s best interest,” Stovall says. “He will probably take advantage of any acquiescence on the side of our trading partners and claim victory with that to save face.”
He recommends following the momentum in sectors like communication services, financials, health care and materials. That means companies like O’Reilly Automotive (ORLY), which gained 1.7% Monday despite having some facilities in Mexico and Canada, or pharmaceutical firms such as Boston Scientific (BSX) and Quest Diagnostics (DGX). Prologis (PLD), an industrial-focused real estate investment trust, is also likely to do well in the event of a prolonged trade dispute considering its domestic focus, Stovall predicts.
Automotive stocks were among the most negatively affected at the beginning of the day Monday, but Canada and Mexico are both important trading partners for car manufacturing. David Whiston, an equities strategist at Morningstar covering the automotive industry, says it’s not a question of who is impacted but who is the least impacted, and if investors’ fears are overstated in some stocks, there could be a buying opportunity.
Gentex Corp. (GNTX), which manufactures automatic dimming rearview mirrors and other electronic equipment for cars, dropped 2.9%, but Whiston says it is less reliant than many peers on other imports. “They don’t have a ton of direct Canada and Mexico exposure, just some wire harness work out of Mexico,” says Whiston, though he adds that it’s still at risk of overall demand for cars dropping if prices rise.
One of Trump’s tariff goals in addition to stemming drug trafficking is to pressure other American businesses to bring more manufacturing back to the U.S. and trade more with American peers, which will help smaller companies who already have most of their footprints close to home. Nicholas Galluccio, who manages the Teton Westwood Small-Cap Equity Fund, points out that companies comprising the Morningstar small-cap value index already generate 70% of their revenue domestically and are trading at a 20% discount to large caps, while historically they’ve fetched a premium. “The threat of tariffs should be a catalyst for multinationals to restore their supply chains back to domestic soil, a boon to smaller companies,” he says.
For investors more inclined to invest in passive index funds instead trying their hand at more risky stock-picking, the Vanguard Small-Cap Value Index Fund ETF (VBR) could be an appropriate option for shelter from a potential trade war.
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