In a shortened trading week for the Thanksgiving holiday, President-elect Donald Trump sent shockwaves through the markets by announcing plans to impose a 25% tariff on all imports from Mexico and Canada alongside a 10% hike on Chinese goods. These measures, he indicated, aim to pressure these countries to address drug trafficking and illegal immigration.

Currency markets reacted swiftly, with the Mexican peso and Canadian dollar plunging to two-year and four-year lows, respectively, before stabilizing as investors reassessed the risks.

The escalating trade tensions took a toll on U.S. automaker stocks, particularly General Motors Company (NYSE:GM), which relies heavily on Mexican production. GM shares tumbled nearly 5% on the week, snapping a three-week winning streak.

Despite the looming risks of a new trade war, broader equity markets remained resilient. The S&P 500 and Dow Jones Industrial Average both extended their record highs, reflecting investor appetite in a historical positive season for stocks.

Small-cap stocks, tracked by the Russell 2000 via the iShares Russell 2000 ETF (NYSE:IWM), also surged, hitting fresh all-time highs on Monday and surpassing their previous peak from November 2021.

Tariffs Hit Automakers

S&P Global estimates that tariffs on Mexico and Canada could slash U.S. automakers' profit margins by as much as 17% in a worst-case scenario. General Motors and Stellantis are expected to be the hardest hit given heavy reliance on Mexican auto exports.

Seasonal Stock Rally

The stock market often excels during the holiday season. Data shows the S&P 500 historically rises 1.5% in December, with November delivering a 1.2% gain on average since 1950. Analysts attribute this to strong retail spending, end-of-year portfolio adjustments and positive sentiment, making it a historically favorable period for investors.

Mortgage Rates Reality

Compass CEO Robert Reffkin indicated that homebuyers are adjusting to the reality of 7% mortgage rates. As affordability pressures ease and inventory remains tight, he expects demand to stabilize. The normalization process could help the mortgage market regain momentum despite challenges posed by elevated borrowing costs.

Fed's Disinflation Confidence

The Federal Reserve’s November meeting minutes reveal officials’ confidence in declining inflation. Markets anticipate a greater likelihood of a 0.25% interest rate cut next month.

Read Next:

Image created using artificial intelligence via Midjourney.