Fact checked by Suzanne Kvilhaug
Reviewed by Ebony Howard

In December 2017, President Donald Trump signed a new tax bill into law. Known previously as the Tax Cuts and Jobs Act (TCJA), the reform has far-reaching impacts on many areas of tax and financial planning. One significant area of impact is estate planning by raising the exemption on the estate tax. Keep reading to learn more about how this law affects the strategies for estate planning.

Key Takeaways

• President Donald Trump signed the Tax Cuts and Jobs Act in 2017.
• The law brought sweeping changes to the U.S. tax system, including to estate planning.
• Under the TCJA, the estate tax exemption more than doubled between 2017 and 2018.
• The generation-skipping tax was also raised.
• More people can give away their wealth without incurring income taxes until the end of 2025.

Changes Under the Tax Reform

The tax reform legislation raised the estate tax exemption to $11.18 million per person and $22.36 million per married couple for 2018. That was a significant increase over prior limits. The estate tax exemption for an individual is $13.61 million in 2024 and $13.99 million in 2025 (an increase to account for inflation). This eliminates any federal estate taxes on amounts under those limits gifted to heirs during your lifetime or left to them upon your death.

The new legislation effectively eliminated the federal estate tax for all but the wealthiest individuals. It is worth noting that as with most of the provisions of the act, these rules are set to expire at the end of 2025. At that time, the exemption amounts will revert to previous levels, adjusted for inflation.

Generation-Skipping Tax

The generation-skipping tax rate exemption also increased to the same amount as above for individuals and married couples. This increase also expires at the end of 2025.

The method used to calculate inflation on these exemptions and other related areas has been changed. Instead of the traditional Consumer Price Index (CPI), which was previously used, inflation and exemptions are calculated based on the chain-weighted CPI, a modified measure of inflation that adjusts for “situation bias,” or accounts for the shifting purchasing behaviors of consumers. The chain-weighted CPI generally yields a lower rate of inflation.

What This Means for You

The temporary increase in the exemptions for the federal estate tax and the generation-skipping tax means that until the end of 2025 (unless Congress repeals or extends these rules), many will be able to give away more of their estate to their heirs without paying estate taxes.

The tax law has obvious benefits for beneficiaries, but its introduction doesn’t eliminate the need for estate and tax planning. Trump’s tax reform did not repeal the estate tax for those states that assess one. If you live in one of the following states, your assets are subject to the appropriate level of any state-imposed estate tax:

• Connecticut
• District of Columbia
• Hawaii
• Illinois
• Maine
• Maryland
• Massachusetts
• Minnesota
• New York
• Oregon
• Rhode Island
• Vermont
• Washington

Note

With many states facing substantial fiscal challenges, it’s not beyond the realm of possibility that some states that currently don’t have an inheritance tax might consider enacting one in the future.

Individuals facing state-level estate taxes should consider tactics such as a disclaimer and a bypass trust or a qualified terminable interest property (QTIP) trust—both of which allow a degree of flexibility in the allocation of the assets in your estate, to minimize the impact of taxes on their estate.

With the increased exemption limits, lifetime gifts of estate assets can be made without concern of triggering federal gift and estate taxes, except for those with estates over the exemption amounts. Gifting can also be done by shifting assets likely to experience high levels of appreciation. This can shield the appreciation of those assets from future estate taxation in your estate once the exemption limits expire after 2025.

Warning

Lifetime gifts are not entitled to a step-up in cost basis as with assets transferred to heirs upon your death. This means that before gifting appreciated assets like shares of stock, be sure to consider the tax impact upon the recipient of the gift.

A Strategy to Protect Your Spouse

You may want to consider the spousal lifetime access trust as a way to protect your spouse. This is an irrevocable trust that removes the assets from your estate and transfers them to an irrevocable trust for your spouse’s benefit.

The advantage is that those assets are out of your estate, allowing you to take advantage of the increased estate tax exemption before the 2025 deadline, while still retaining a degree of control over those assets via your spouse during their lifetime.

Be warned, though, that SLATs come with downsides. Should you divorce, you have no claim to the assets in the SLAT. It is also critical to ensure that, should you both use a SLAT, the trusts are not identical. This helps to avoid the risk that the trusts will be deemed to be substantially identical, in violation of the reciprocal trust doctrine, which could invalidate the trust.

Accidental Disinheritance

One potential unintended consequence of the higher exemption limits is that some heirs may unintentionally be disinherited.

Many estate plans are set up to use a bypass trust, which directs a trustee to use any remaining estate tax exemption amount to fund the bypass trust. This would be done before distributing the remaining assets in the estate to the intended heirs.

The size of the bypass trust in a case like this could cause some heirs to be unintentionally disinherited. Those with this type of provision should review their estate planning documents.

The Life Insurance Option

Life insurance is a popular way to help heirs cover any estate taxes that might be due in conjunction with a large estate over the exemption limits. With the increase in the exemption, the prevalence of these exemptions may wane.

These policies can now serve as a backstop for the estate, allowing grantors to pass assets in a tax-efficient manner and providing liquidity in cases where some of the estate assets are illiquid, such as real estate or an interest in a business.

What Are the Tax Rates for U.S. Taxpayers?

The tax rates for individual taxpayers are: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The threshold for each tax rate changes each year based on inflation and is different for married couples filing jointly and other tax filers. But, the rates are set to revert to their original levels after the TCJA expires at the end of 2025.

What Happens to the Tax Cuts and Jobs Act after 2025?

Many provisions of the Tax Cuts and Jobs Act are set to expire at the end of 2025. This includes marginal tax rates, the increased basic standard deduction, and the credit for other dependents among others. Experts suggest that extending the expiring cuts would cost taxpayers an additional $4 trillion over 10 years.

What Type of Tax System Does the U.S. Have?

The United States functions under a progressive tax system. This means that the rate at which individual taxpayers are taxed is based on how much they earn. As such, your taxes increase if you earn more income while those with lower income levels are taxed less.

The Bottom Line

Tax reform has resulted in many changes for taxpayers, beginning with the 2018 tax season. Estate planning is one area that has been impacted, but like most of the tax reform legislation, the impact is temporary and will largely revert to the prior rules after 2025.

Especially for those with larger estates, it is wise to review your current estate planning documents to ensure that they still do what you intended for them to do and to ensure that you are taking full advantage of any opportunities under tax reform.

ETFs can help investors diversify their portfolio through a single investment product

Exchange-traded funds (ETFs) are investment funds that trade on stock exchanges, similar to individual stocks, and typically track an index, sector, commodity, or asset class. They offer
investors diversification, as a single ETF can hold a broad mix of securities, reducing risk compared to investing in individual stocks. ETFs also tend to have lower expense ratios than actively managed mutual funds and provide liquidity, allowing investors to buy and sell shares throughout the
trading day at market prices.

Key Takeaways

• Leading ETFs offer investors an opportunity to broadly diversify their holdings through a single investment with a low expense ratio and/or higher returns compared to competitors.
• We screened for the equity, bond, fixed income, commodities, and currency ETFs providing the highest one-month total returns for February 2025.
• These funds include XES, XMPT, CMBS, UNG, FXY

Below, we outline the top equity, bond, fixed income, commodities, and currency ETFs that generated the highest returns over the last month. We have excluded leveraged and inverse ETFs, as well as funds with less than $50 million in assets under management (AUM).

All data are current as of Jan. 27, 2025.

Equity ETF with the Best 1-Month Return: SPDR S&P Oil & Gas Equipment & Services ETF (XES)

• One-month performance: 12.9%
• Expense Ratio: 0.35%
• Annual Dividend Yield: 1.22%
• 30-Day Average Daily Volume: 48,460 
• Assets Under Management (AUM): $240.4 million
• Inception Date: June 19, 2006
• Issuer: State Street

The SPDR S&P Oil & Gas Equipment & Services ETF (XES) offers investors exposure to the U.S. energy industry’s equipment and services sub-sector. By employing an equal-weighted
strategy, XES provides balanced exposure across its holdings, reducing the concentration risk associated with larger-cap companies. As of Jan. 24, 75% of the portfolio is in stocks of oil and gas equipment and services companies, and 25% of the portfolio is in oil and gas drilling.

Bond ETF with the Best 1-Month Return: VanEck CEF Muni Income ETF (XMPT)

• One-month performance: 2.4%    
• Expense Ratio: 1.98%
• Annual Dividend Yield: 5.3%
• 30-Day Average Daily Volume: 176,335
• Assets Under Management (AUM): $199 million
• Inception Date: July 12, 2011
• Issuer: VanEck

The VanEck CEF Muni Income ETF (XMPT) offers investors exposure to the municipal bond market by investing in closed-end funds that hold municipal bonds. This approach provides access to a
diversified portfolio of municipal bonds managed by various fund managers.

Fixed Income ETF with the Best 1-Month Return: iShares CMBS ETF (CMBS)

• One-month performance: 0.95%      
• Expense Ratio: 0.25%
• Annual Dividend Yield: 3.3%
• 30-Day Average Daily Volume: 65,065
• AUM: $436 million
• Inception Date: Feb. 14, 2012
• Issuer: iShares/BlackRock

The iShares CMBS ETF (CMBS) provides targeted exposure to U.S. commercial mortgage-backed
bonds, offering investors access to a specific segment of the mortgage-backed securities market.

Commodities ETF with the best 1-Month Return: United States Natural Gas Fund LP (UNG)

• One-month performance: 15.9%
•  Expense Ratio: 1.06%
• Annual Dividend Yield: N/A
• 30-Day Average Daily Volume: 13,123,380
• AUM: $665 million
• Inception Date: April 18, 2007
• Issuer: Marygold

The United States Natural Gas Fund (UNG) is an ETF designed to closely track the daily price movements of natural gas using its Benchmark Futures Contract, primarily the near-month natural gas futures trading on the NYMEX. UNG had a strong one-month performance, as natural gas prices have rallied following colder-than-anticipated weather in the United States.

Currency ETF with the Best 1-Month Return: Invesco Currency Shares Japanese Yen Trust (FXY)

•  One-month performance: 0.77% 
• Expense Ratio: 0.4% 
• Annual Dividend Yield: N/A
• 30-Day Average Daily Volume: 144,980 
• AUM: $396 million 
• Inception Date: Feb. 12, 2007
• Issuer: Invesco

The Invesco Currency Shares Japanese Yen Trust (FXY) is an ETF designed to track the price of the Japanese yen through physical yen holdings. The yen serves as Japan’s national currency and is managed by the Bank of Japan, the country’s central bank.

How We Chose the Best ETFs

We selected the best ETFs across five areas of focus—equities, bonds, fixed-income, commodities, and currencies—utilizing a screener by VettaFi. In each case, we sorted ETFs according to the specified category and ranked them by highest one-month returns. We then filtered out any ETFs that employ a leveraged or inverse strategy, as well as any with less than $50 million in assets under management. Finally, for currencies ETFs, we excluded any funds focused on cryptocurrencies from our screen.

How to Invest in ETFs

To invest in ETFs, start by researching and selecting an ETF that aligns with your financial goals, risk tolerance, and investment strategy—whether it tracks a broad market index, a specific sector, or a commodity. Open a brokerage account with a platform that offers ETF trading, then place an order
just like you would for a stock. Consider factors such as expense ratios, liquidity, and tracking accuracy to ensure you’re getting the best value for your money. Depending on your time horizon and risk tolerance, ETFs typically require minimal maintenance and are often considered long-term, buy-and-hold investments.

The Bottom Line

ETFs are versatile and cost-effective investment options that provide diversification, liquidity, and tax efficiency, making them ideal for both new and experienced investors. With minimal maintenance required, they offer a simple way to gain exposure to broad markets or specific sectors while managing risk.

The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our warranty and liability disclaimer for more info.

As of the date this article was written, the author does not own any of the above ETFs.

Fact checked by Hans Daniel Jasperson
Reviewed by Charles Potters

New legislation is introduced and passed through the U.S. Congress every five to six years to subsidize farmers and agricultural products. These bills provide benefits like cash, minimum prices, and crop insurance programs. Most academic economists and policy analysts oppose agricultural subsidies, but that seems to have little impact on the continuous transfer of taxpayer money to farmers.

Key Takeaways

• The farm bill is used to subsidize farmers and agricultural products.
• The bill is passed through Congress every five to six years.
• Some of the main farm subsidies include crop insurance, agricultural risk coverage, and disaster relief.
• Subsidies were deemed necessary as farmers were considered essential to the national economy.

The Farm Bill

As noted above, the farm bill allows lawmakers to make changes to agriculture and food programs every five to six years. The Agriculture Improvement Act of 2018, P.L. 115-334 was signed into law by President Donald Trump in December 2018 and was extended beyond the five-year term to include the 2024 crop year. The bill:

• Modified farm commodity support
• Expanded crop insurance coverage
• Made changes to conservation programs
• Reauthorized and revised nutrition assistance

When the bill was enacted in 2018, the farm bill’s mandatory programs were estimated to cost $428 billion for the full five-year period. That cost was estimated at $867 billion over a 10-year basis, with nutrition and crop insurance taking up the bulk of the outlays.

Important

The U.S. Department of Agriculture (USDA) is a federal agency that oversees the farming, ranching, and forestry industries. It is also responsible for food quality, food safety, and nutrition labeling.

Scope of Farm Subsidies

These bills tend to be massive. From 1962 to 2019, farm income stabilization programs averaged $13.2 billion. These subsidies target wheat, rice, soybeans, oats, barley, sorghum, minor oilseeds, peanuts, corn, and cotton.

Marketing loans set minimum prices for crops, encouraging overproduction beyond market demands for the aforementioned products as well as honey, chickpeas, wool, and mohair.

The table below highlights some of the major types of agricultural subsidies, including counter-cyclical payments for crops, conservation subsidies that pay farmers to not grow crops, USDA farm insurance programs, special crop disaster assistance programs, and taxpayer-funded agricultural research.

Reasons for Farm Subsidies

Before the Industrial Revolution, nearly all of the workforce was employed in farm labor. For example, 90% of all working Americans were farm owners or worked on farms in 1790. Understandably, farmers were seen as economically crucial. Politicians were elected by being friends of farmers.

Wealthy farmers have been successful in lobbying for government favors throughout history. Some subsidies existed in the U.S. before the Great Depression, but most modern programs date to the 1930s. It was thought that propping up farm prices would keep farmers from going bankrupt; the net result made food more expensive for people struggling to afford it.

Political economists note that subsidies tend to never go away through a phenomenon called public choice theory. This means that wealthy farmers essentially have more incentive to fight for subsidies than consumers do to fight against them.

What Is a Subsidy?

A subsidy is a sum of money or financial benefit provided to an individual, business, or other entity by the government. Subsidies are often provided for economic or social benefit and to remove a financial burden from the recipient. Examples of subsidies include welfare payments, unemployment benefits, and those paid to major industries that function within the economy, such as agriculture and energy companies.

What Is the Largest Agricultural Subsidy Program?

Insurance is the largest agricultural subsidy program. This program costs the government about $10 billion each year and provides farmers with 60% of their insurance premiums. Private sector insurance companies are also reimbursed for their administrative expenses and underwriting gains for writing insurance policies.

When Was the First Farm Bill Passed?

The farm bill was first signed into law in the United States in 1933 as part of the New Deal. It was called the Agricultural Adjustment Act of 1933. The bill aims to address areas of concern for the agricultural industry, including trade and support. The most recent bill was signed into law by Donald Trump in December 2018.

The Bottom Line

Subsidies are commonly paid by governments to different industries for a variety of reasons. This includes boosting production and consumption levels and helping keep key players in struggling sectors afloat. The farm bill, which was introduced in 1933 as part of the New Deal, offers government benefits to farmers and companies in the agricultural sector. It is updated every five to six years. Crop insurance, price loss coverage, and disaster aid are among the largest and most common subsidies offered by the U.S. government.

These are some of the best-performing stocks in the health care sector over the past month

The health care sector is massive and incredibly varied, including companies that make medical equipment or drugs, those that offer medical services, and even those providing insurance in some cases. Within this sector, there are startups that are pre-revenue and working from quarter to quarter to launch an innovative product, major legacy service providers, and everything in between. Investors thus have many options to choose from when focused on health care. At the same time, though, the health care sector is highly complex, and investors are cautioned to familiarize themselves with the ins and outs of health care companies before launching an investment.

Key Takeaways

• Some of the best health care stocks for February 2025, based on 30-day returns, include Akero Therapeutics Inc., Guardant Health Inc., and Inari Medical Inc.
• The best-performing health care stocks in the last month returned at least 39.5%.
• An aging population and increasing medical needs are two factors contributing to massive growth in the health sector.

We examine below several of the best health care stocks to watch for February 2025, based on highest 30-day percentage return. We include an explanation of the other factors in our screen below. All data are current as of Jan. 28, 2025.

What to Know About the Health Care Sector

The health care sector was among the hardest hit by the COVID-19 pandemic and has yet to fully recover; the sector continues to face a significant labor shortage that has been exacerbated by ongoing inflation concerns. Significant elements of the way health care operations function—from a shift away from in-person medical appointments to changes in insurance and demand for new products, among many others—have forced long-time leaders in the space to reevaluate their offerings and presented openings for upstart firms to gain a foothold. Going forward, the health care sector will wrestle with a growing population of patients who are eligible for Medicaid and Medicare, opportunities presented by AI, and more.

One trend for investors to keep a close eye on is the ongoing popularity of GLP-1 agonists, a type of drug used to treat Type 2 diabetes and to help with weight loss. With about 1 billion people globally living with obesity, the potential market for these drugs is incredibly large. The two leading providers of these drugs are Novo Nordisk A/S (NVO) and Eli Lilly and Co. (LLY), but the market is far from settled.

How We Chose the Best Health Care Stocks

To screen for the best health care stocks this month, we looked at firms listed on either the Nasdaq or the New York Stock Exchange. To ensure we focused on established companies, we filtered out any companies with a share price below $5, with a minimum daily trading volume of under 100,000, and with a market capitalization below $300 million. From that subset of stocks, we ranked companies according to the highest 30-day percentage return.

Notably, none of the companies in our results had a P/E ratio. One of the most common reasons for a company to not have a P/E ratio is if it either took a loss or generated no earnings in the given time period, or in the prior-year period for comparison. This makes the calculation of a P/E ratio impossible. For clinical-stage pharmaceutical firms, many of which are pre-revenue or consistently post losses while developing their products, it is common to not have a P/E ratio until the launch of a significant drug product.

Health Care Stock Advantages and Disadvantages

National health expenditures reached $4.9 trillion in 2023, making the health care sector massive. A key benefit health care provides to investors is consistent demand. Because individuals will always have medical needs to be met, the overall demand for health products and services typically remains at least constant and tends to increase over time as populations grow older. Nationwide health care expenditures are expected to surge to $6.8 trillion by the year 2030.

Health care companies are enticing to investors because they are highly incentivized to use and create new technology, both to meet rising demand and to improve the affordability of care they can offer. This focus on innovation may mean that health care stocks offer the potential for short- and long-term gains.

It is common in the sector for individual companies to experience a significant breakout when an important new product is launched—such as a new medical device with broad applications or a blockbuster new drug—or even when clinical trial data is encouraging. Health care stocks often experience astronomical rallies during these moments.

On the other hand, there are some risks to investing in health care companies that investors should be aware of as well. One of the biggest risks is the size and scope of the sector. Due to the technical nature of the work of many health care companies, it can be difficult for outside investors to accurately assess the viability of a company or its products. Additionally, many companies in the space are heavily impacted by legislation, which can change and contribute to volatility.

Undoubtedly there are opportunities for major returns for investors looking to the health care sector. However, no one can predict how a company’s stock may perform. The companies above led the sector in our screen, but past performance is not a guarantee of future returns.

The Bottom Line

The health care sector is massive, complex, and rich with opportunities for investors willing to take the time to understand its ins and outs. Our screen favors companies in the pharmaceuticals space that have experienced strong returns in the last month, occasionally due to the success of a popular drug or other product. But just as some of these firms may rise rapidly, they may also fall just as precipitously, particularly if a promising new product ends up not working as expected.

The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our warranty and liability disclaimer for more info.

As of the date this article was written, the author does not own any of the above securities.

These are some of the best-performing stocks in the energy sector over the past month

Companies in the energy sector explore for and develop oil and gas products, provide consolidated utility services, and discover and market renewable energy sources, among other things. The energy market is massive and likely to only grow as demand surges. However, large-scale shifts away from the traditional fossil fuel portion of the sector have prompted even stalwart energy firms to pivot in recent years.

Key Takeaways

• The best energy stocks for February 2025 based on 30-day returns include Valero Energy Corp., PBF Energy Inc., and Civitas Resources Inc.
• Collectively, energy stocks were up about 6.4% in the last month.
• Energy company stocks frequently move in tandem with the prices of energy products themselves. Because these products can be highly volatile, stock prices also have the potential for instability.

We’ve compiled the best energy stocks to watch for February 2025 based on 30-day returns. Other factors included in our screen can be found in the detailed explanation of our ranking methodology below. All data are current as of Jan. 28, 2025.

What to Know About the Energy Sector

As a group, energy stocks rose throughout fall 2024, spiking after the U.S. presidential election and falling toward the end of the year. In January, they recovered most of the ground given up during that time. Generally, energy stock prices often move in tandem with energy prices. For example, in 2022, amid the initial months of Russia’s invasion of Ukraine, energy prices peaked and many companies in the sector also experienced gains.

Production levels around the world are an essential factor in the performance of energy sector stocks. U.S. oil production is expected to increase under President Trump, although it has been at a high level for some time prior to the new administration. On the other hand, some OPEC+ countries have capped production. Analysts expect demand for energy products to continue to grow, driven by factors including increased reliance on high-usage services like cloud and artificial intelligence, among other things.

How We Chose the Best Energy Stocks

We screened for the best energy stocks by looking at all energy companies trading on either the Nasdaq or the New York Stock Exchange. From there, we included companies with a share price of at least $5, with daily trading volumes of 100,000 or more, and with a market capitalization of $300 million or higher. This is to ensure that our screen includes established firms in the energy industry.

Next, we ranked the remaining energy companies by 30-day return and identified the top-performing stocks based on that metric. We excluded any companies with negative returns during that period. Our screen includes stocks of energy companies and does not include products utilized directly in energy trading.

In our list, one of the stocks does not include a P/E ratio. This may be the case when a company has posted losses in the period in question or in the prior year period, making it impossible to calculate a P/E ratio.

Energy Stock Advantages and Disadvantages

The energy market is both gargantuan and growing, providing a significant potential benefit to investors. The global energy market is valued at about $6 trillion. Due to continued demand for energy to power factories, machinery, cars, and much more, companies are able to take part in the energy sector in many ways. This provides investors a range of options from which to choose within this large sector, including companies focused on energy production, transportation, distribution, storage, and more. Energy companies also exist in both traditional and more experimental corners of the market.

Demand for energy products is only likely to increase, and this is likely to drive growth in the size of the market into the future. The U.N. anticipates a global investment of $2.4 trillion per year over the coming decade in order to meet the goals of the Paris Climate Agreement. Renewable energy sources are becoming more popular and commonplace globally, offering investors a greater degree of variety in terms of the types of energy investment opportunities they experience.

There are also some important disadvantages and risks associated with energy sector investment. Fundamentally, many energy companies are heavily dependent upon the price of energy products; a crash in the market could be devastating, and even day-to-day volatility can make investing a challenge. As a highly complex, global market, energy can be difficult to assess for investors looking to identify strong options.

Further, many companies in the energy sector use products and practices that contribute significantly to climate change. Investors seeking companies with a strong history of meeting ESG standards may be limited in their approach in the energy sector.

While the stocks above are at the top of our list for this month, it’s important to remember that past performance does not guarantee future returns.

The Bottom Line

Energy sector companies include those focused on hydrocarbons, renewable energy, some utilities firms, and much more. Because they are often closely linked to the price of oil and other energy products, their share prices may be volatile. But the size of the market and the expectation of future growth make energy an enticing prospect for many investors.

The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our warranty and liability disclaimer for more info.

As of the date this article was written, the author does not own any of the securities listed above.

Reviewed by Gordon Scott

Risk management is the work of balancing opportunities for gains with the potential of making losses from your investing choices. This work can help reduce potential losses and increase potential gains. It can also help protect traders’ accounts from losing all of their money. The risk of losing money occurs when traders open positions. The larger the positions, the greater the risk, but also the greater opportunity for profit.

Risk management is an essential but often overlooked prerequisite to successful active trading. After all, a trader who has generated substantial profits can lose it all in just one or two bad trades without a proper risk management strategy. So how do you develop the best techniques to curb the risks of the market?

This article will discuss some simple strategies that can be used to protect your trading profits.

Key Takeaways

• Trading can be exciting and even profitable if you are able to stay focused, do due diligence, and keep emotions at bay.
• Still, the best traders need to incorporate risk management practices to prevent losses from getting out of control.
• Having a strategic and objective approach to cutting losses through stop orders, profit taking, and protective puts is a smart way to stay in the game.

Planning Your Trades

As Chinese military general Sun Tzu’s famously said: “Every battle is won before it is fought.” This phrase implies that planning and strategy—not the battles—win wars. Similarly, successful traders commonly quote the phrase: “Plan the trade and trade the plan.” Just like in war, planning ahead can often mean the difference between success and failure.

First, make sure your broker is right for frequent trading. Some brokers cater to customers who trade infrequently. They charge high commissions and don’t offer the right analytical tools for active traders.

Stop-loss (S/L) and take-profit (T/P) points represent two key ways in which traders can plan ahead when trading. Successful traders know what price they are willing to pay and at what price they are willing to sell. They can then measure the resulting returns against the probability of the stock hitting their goals. If the adjusted return is high enough, they execute the trade.

Conversely, unsuccessful traders often enter a trade without having any idea of the points at which they will sell at a profit or a loss. Like gamblers on a lucky—or unlucky—streak, emotions begin to take over and dictate their trades. Losses often provoke people to hold on and hope to make their money back, while profits can entice traders to imprudently hold on for even more gains.

Consider the One-Percent Rule

A lot of day traders follow what’s called the one-percent rule. Basically, this rule of thumb suggests that you should never put more than 1% of your capital or your trading account into a single trade. So if you have $10,000 in your trading account, your position in any given instrument shouldn’t be more than $100.

This strategy is common for traders who have accounts of less than $100,000—some even go as high as 2% if they can afford it. Many traders whose accounts have higher balances may choose to go with a lower percentage. That’s because as the size of your account increases, so too does the position. The best way to keep your losses in check is to keep the rule below 2%—any more and you’ll be risking a substantial amount of your trading account.

Setting Stop-Loss and Take-Profit Points

A stop-loss point is the price at which a trader will sell a stock and take a loss on the trade. This often happens when a trade does not pan out the way a trader hoped. The points are designed to prevent the “it will come back” mentality and limit losses before they escalate. For example, if a stock breaks below a key support level, traders often sell as soon as possible.

On the other hand, a take-profit point is the price at which a trader will sell a stock and take a profit on the trade. This is when the additional upside is limited given the risks. For example, if a stock is approaching a key resistance level after a large move upward, traders may want to sell before a period of consolidation takes place.

How to More Effectively Set Stop-Loss Points

Setting stop-loss and take-profit points is often done using technical analysis, but fundamental analysis can also play a key role in timing. For example, if a trader is holding a stock ahead of earnings as excitement builds, they may want to sell before the news hits the market if expectations have become too high, regardless of whether the take-profit price has been hit.

Moving averages represent the most popular way to set these points, as they are easy to calculate and widely tracked by the market. Key moving averages include the 5-, 9-, 20-, 50-, 100- and 200-day averages. These are best set by applying them to a stock’s chart and determining whether the stock price has reacted to them in the past as either a support or resistance level.

Another great way to place stop-loss or take-profit levels is on support or resistance trend lines. These can be drawn by connecting previous highs or lows that occurred on significant, above-average volume. The key is determining levels at which the price reacts to the trend lines or moving averages and, of course, on high volume.

When setting these points, here are some key considerations:

• Use longer-term moving averages for more volatile stocks to reduce the chance that a meaningless price swing will trigger a stop-loss order to be executed.
• Adjust the moving averages to match target price ranges. For example, longer targets should use larger moving averages to reduce the number of signals generated.
• Stop losses should not be closer than 1.5 times the current high-to-low range (volatility), as it is likely to get executed without reason.
• Adjust the stop loss according to the market’s volatility. If the stock price isn’t moving too much, then the stop-loss points can be tightened.
• Use known fundamental events such as earnings releases, as key time periods to be in or out of a trade as volatility and uncertainty can rise.

Calculating Expected Return

Setting stop-loss and take-profit points are also necessary to calculate the expected return. The importance of this calculation cannot be overstated, as it forces traders to think through their trades and rationalize them. It also gives them a systematic way to compare various trades and select only the most profitable ones.

This can be calculated using the following formula:

[(Probability of Gain) x (Take Profit % Gain)] + [(Probability of Loss) x (Stop-Loss % Loss)]

The result of this calculation is an expected return for the active trader, who will then measure it against other opportunities to determine which stocks to trade. The probability of gain or loss can be calculated by using historical breakouts and breakdowns from the support or resistance levels—or for experienced traders, by making an educated guess.

Diversify and Hedge

Making sure you make the most of your trading means never putting all your eggs in one basket. If you put all your money into one idea, you’re setting yourself up for a big loss. Remember to diversify your investments—across both industry sector as well as market capitalization and geographic region. Not only does this help you manage your risk, but it also opens you up to more opportunities.

You may also find yourself needing to hedge your position. Consider a stock position when the results are due. You may consider taking the opposite position through options, which can help protect your position. When trading activity subsides, you can then unwind the hedge.

Downside Put Options

If you are approved for options trading, buying a downside put option, sometimes known as a protective put, can also be used as a hedge to stem losses from a trade that turns sour. A put option gives you the right, but not the obligation, to sell the underlying stock at a specified priced at or before the option expires. Therefore, if you own XYZ stock for $100 and buy the six-month $80 put for $1.00 per option in premium, then you will be effectively stopped out from any price drop below $79 ($80 strike minus the $1 premium paid).

What Is Active Trading?

Active trading means regularly attempting to take advantage of short-term price fluctuations. You’re not buying stocks for retirement. The goal is to hold them for a limited amount of time and try to profit from the trend. Active traders are named as such because are frequently in and out of the market.

What Are the Risk Management Techniques Used by Active Traders?

Techniques that active traders use to manage risk include finding the right broker, thinking before acting, setting stop-loss and take-profit points, spreading bets, diversifying, and hedging.

What Is the 1% Rule in Trading?

The 1% rule demands that traders never risk more than 1% of their total account value on a single trade. In a $10,000 account, that doesn’t mean you can only invest $100. It means you shouldn’t lose more than $100 on a single trade.

How Do I Become a Successful Active Trader?

To become a successful active trader you must understand financial markets and be familiar with the various tools used to read price movements. You must also have sufficient capital and time to trade and be capable of keeping your emotions in check. The key is having a strategy and sticking to it. And, if you want to be successful over the long term, spreading out your bets.

Active trading isn’t for everyone. Despite what you may hear, it isn’t easy and guaranteed to generate enough money for you to quit your day job. Think carefully, start small, and try simulating some trades on a test account before putting your money on the line.

The Bottom Line

Traders should always know when they plan to enter or exit a trade before they execute. By using stop losses effectively, a trader can minimize not only losses but also the number of times a trade is exited needlessly. In conclusion, make your battle plan ahead of time and keep a journal of your wins and losses.

Fact checked by Michael Logan
Reviewed by Somer Anderson

The stock markets famously display a sustained upward trend over the long term. But it’s the intermittent tailspins—like the 50% drop endured by most major markets during the 2008-09 global credit crisis—that test the fortitude of an investor.

The nimblest investors can make money no matter what is happening in the world. Trading the news should be an integral component of your investing strategy. While a day trader may trade the news constantly, a long-term investor might do so only occasionally.

Regardless of your investing horizon, learning to trade the news is an essential skill for astute portfolio management and long-term performance.

Key Takeaways

• Much of the news that moves the markets is scheduled, such as earnings reports and economic updates. Plot your strategy in advance rather than reacting on the fly.
• Most news events are good for one asset class and bad for others. Hedging your portfolio cushions losses.
• Avoid reacting to crowd sentiment. If you have confidence in your choices of investments, stick with them.

Classifying News

News can be broadly classified into two categories:

• Periodic or Recurring: This includes the scheduled releases of news that moves the markets, including interest rate announcements by the Federal Reserve, economic data releases, and quarterly earnings reports from companies.
• Unexpected or One-Time: These are bolts from the blue such as a terrorist attack, a sudden geopolitical flare-up, or the threat of debt default by an indebted nation. As a rule of thumb, unexpected news is more likely to be bad than good.

News can be specific to a particular stock or it can affect a sector, an industry, or the markets as a whole.

Trading the News

Here are a few examples of historical events and the actions that an investor could have taken in response.

A Federal Reserve Announcement

The Federal Open Market Committee’s (FOMC) interest rate announcements have always been among the biggest market-moving events, but its announcement in mid-March 2020 was of unusual interest, not least because it was issued on a Sunday.

In an effort to ease the economic effects of the 2020 coronavirus crisis, the Fed cut its main lending rate by 1%. It was the second cut of the month. It also announced plans to buy $700 billion in government securities.

The next day, the Dow Jones Industrial Average dropped 3,000 points for its worst day since the 1987 crash.

Many investors would have bet on a great day on Wall Street, and they would have been wrong. Other headlines dominated, including comments from President Donald Trump saying that the pandemic could last until August. (It turned out to be much worse.)

Nevertheless, investors who held on for just a few more weeks would have been amply rewarded when the markets started climbing again.

An investor in stocks who was looking to hedge potential downside risk could have done any of the following immediately after the Fed’s announcement:

• Trimmed positions in highly profitable equity positions to take some money off the table.
• Purchased puts either on specific stocks in the portfolio or on a broad market index like the S&P 500 or Nasdaq 100. Purchasing puts gives the investor the right to sell a stock for an agreed-upon price at a future time. If the security’s market price falls below the agreed-upon price, the investor gains by selling at the higher contractual price.
• Bought inverse exchange-traded funds (ETFs) to protect portfolio gains. These move in the opposite direction of the broad market or a specific sector.

While these reactive moves would typically be carried out after the Fed announcement, a proactive investor could implement the same steps in advance of a scheduled Fed statement.

This reactive or proactive approach to an important event or piece of news, of course, depends on the investor’s confidence in predicting the market’s near-term direction. An individual’s risk tolerance and trading approach (passive or active) also are factors.

A Jobs Report

In terms of economic data releases, few are more important than the U.S. jobs report because of its wider implications.

Traders and investors closely watch the employment level because it has a substantial impact on consumer confidence and spending, which accounts for 70% of the U.S. economy.

Job numbers that miss economists’ forecasts are generally interpreted as signs of incipient economic weakness, while payroll numbers that surge past forecasts are seen as a sign of strength.

In March 2021, the government announced that nonfarm payroll employment had increased by 916,000 the previous month, lowering the unemployment rate to 6%. About 210,000 new jobs were expected to be created. Crucially, many of the new jobs were in the travel industry, signaling a rebound in discretionary spending.

After a seesaw session, the Dow Jones Industrial Average closed up 171 points.

The investor playbook for trading jobs data is based on predictable market reactions.

• Payroll numbers below expectations: Suggests that the Fed will be forced to keep interest rates low for an extended time period. The impact on specific asset classes could be predicted in this table:

• Payroll numbers above expectations: Implies that the Fed may scale back the pace of asset purchases, which could send bond yields and market interest rates higher. The likely result:

An investor could use these market reactions to formulate an appropriate trading strategy to implement either in advance of the jobs report or after its release.

A Corporate Earnings Report

If you invest in individual stocks, it is advisable to have a trading strategy in place in advance of the relevant company earnings reports.

A stock’s price can soar or tank in minutes after releasing numbers that impress or disappoint. Imagine having a huge short position in a stock and watching it soar 40% in the after-market because its earnings were much better than expected.

Trading an earnings report is by no means required. If you’re in a stock for the long term, and you believe in its potential, you can ride out any quarterly storms.

But if you have a large position in a stock, long or short, you need to weigh the merits of leaving it unchanged over the earnings report or making changes just before the report comes out. Factors that should play a part in this decision include:

• The current state of the overall market (bullish or bearish);
• Investor sentiment for the sector to which the stock belongs;
• The current level of short interest in the stock;
• Earnings expectations (too high or comfortably low);
• Valuations for the stock;
• Its recent and medium-term price performance;
• The earnings and outlook reported by its competitors.

For example, an investor with a 15% position in a big-cap technology stock that is trading at multi-year highs may decide to trim positions in it ahead of the earnings report so that it constitutes only 10% of the portfolio.

An alternative option could be to buy puts to hedge downside risk. While this would enable the investor to leave the position unchanged at 15% of the portfolio, this hedging activity would incur a significant cost.

Key points to note: Avoid taking an unduly large position, and have a risk mitigation strategy in place to cap losses if the trade does not work out.

A Bolt from the Blue

Not surprisingly, the onset of the coronavirus pandemic in 2020 was a global event that threw stock exchanges around the world into a bear market from Feb. 20, 2020, until April 7, 2020.

Don’t worry if you don’t remember this. The stock markets then began a long upward trajectory and hit new record highs. The bull market that had begun after the 2007-2008 financial crisis resumed after a blip that lasted for less than two months.

This does not mean that bad news doesn’t matter. But it does suggest that the impulse to sell everything and take to the hills may be an overreaction. Over the years, the financial markets have demonstrated resilience.

During times of geopolitical uncertainty, it may be prudent to rotate out of more speculative stocks and into higher-quality investments. You might also consider hedging downside risk using options and inverse ETFs.

While you should scale back your stock exposure if it is uncomfortably high, bear in mind that in most cases, short-term corrections caused by unexpected geopolitical or macroeconomic events have proved to be the quintessential long-term buying opportunities.

Tips for New Traders

• Know the dates and times of important events: Information on the dates and times of key market events such as FOMC announcements, economic data releases, and earnings reports from key companies is readily available online.
• Have a strategy in place beforehand: Plot your trading strategy in advance so that you are not forced into making a rash decision in the heat of the moment. Know your exact trading entry and exit points before the action begins.
• Avoid kneejerk reactions: Make rational investment decisions based on your risk tolerance and investment objectives. This may require you to be a contrarian on occasion, but as successful long-term investors will attest, it’s the best approach for successful equity investing.
• Cap your risk levels: Avoid the temptation to make a fast buck by taking a concentrated long or short position. What if the trade goes against you?
• Have the courage of your convictions: Assuming you’ve done your homework, consider adding to an existing position if the stock plunges below its intrinsic value, or selling out to take profits in a stock that is wildly popular at the moment.
• See the big picture: Often, investor reaction to the news may not be as expected. You’d think an announcement of a dividend cut would lead to a sell-off in a stock. Sometimes, investors applaud the move as a signal that a company is investing more in its business.
• Don’t be swayed by market sentiment: Being overly swayed by market sentiment can tempt you to buy high—when euphoria runs rampant—and sell low. Many hapless investors were so spooked by the unrelenting tide of bad news in 2008 that they exited their equity positions near the lows, incurring massive losses in the process. They missed out on a stunning gain of 166% in the S&P 500 from March 2009 to October 2013.
• Know when to “fade” the news: Sometimes it is as important to ignore the news or “fade” it as it is to trade it. If you’re in it for the long term, you can ignore the noise.

What Are the Most Important Economic Indicators?

Investopedia identifies the 10 most important reports that an investor should keep an eye on to understand the big economic picture: quarterly gross domestic product; monthly employment; industrial production; consumer spending; inflation; home sales; home construction; construction spending; manufacturing demand, and retail sales.

Collectively, these reports can give you a good sense of the current state of U.S. business and its likely near-term direction.

What Is a Leading Indicator vs. a Lagging Indicator?

A leading indicator is an economic report that can be used to anticipate a trend. The new construction starts report indicates whether the home-building industry is betting on higher or lower sales in the short-term future.

A lagging indicator confirms a trend. The home sales report tells you whether home builders were correct in their assumptions.

Investors tend to pay more attention to leading indicators. They want to anticipate the news, not react to it.

What Is Market Sentiment and Should I Pay Attention to It?

Market sentiment is the mood of the market. In short, it’s the herd mentality. It’s best avoided unless you judge that the sentiment, upbeat or downbeat, has a sound basis in fact. Ignore it and you qualify as a contrarian.

The Bottom Line

Trading the news is crucial for positioning your portfolio to take advantage of market moves and boost your overall returns. But your trading decisions should be made in a thoughtful and measured way. Keep an eye on the news and watch for meaningful trends. Panic decisions are almost always a cause for regret.

Fact checked by Yarilet Perez
Reviewed by Robert C. Kelly

What Are Tariffs?

Tariffs are a type of trade barrier that makes imported products more expensive than domestic ones. Tariffs typically come in the form of taxes or duties levied on importers, and they’re eventually passed on to consumers. They’re commonly used in international trade as a protectionist measure.

For example, in February 2025, President Trump implemented a 25% tariff on imports from Canada and Mexico and a 10% tariff on imports from China. There’s also a 10% tariff on energy resources from Canada.

This article will examine how some countries react to a variety of factors that attempt to influence trade.

Key Takeaways

• Tariffs are a type of protectionist trade barrier that can come in several forms.
• Tariffs are paid by domestic consumers and not the exporting country, but they have the effect of raising the relative prices of imported products.
• Other trade barriers include quotas, licenses, and standardization, all seeking to make foreign goods more expensive or available in a limited supply.

Who Collects a Tariff?

In simplest terms, a tariff is a tax. It adds to the cost borne by consumers of imported goods and is one of several trade policies that a country can enact. Tariffs are paid to the customs authority of the country imposing the tariff.

Tariffs on imports coming into the United States, for example, are collected by Customs and Border Protection, acting on behalf of the Commerce Department. In the U.K., it’s HM Revenue & Customs (HMRC) that collects the money.

It is important to recognize that the taxes owed on imports are paid by domestic consumers and not imposed directly on the foreign country’s exports. The effect is nonetheless to make foreign products relatively more expensive for consumers, but if domestic manufacturers rely on imported components or other inputs in their production process, they will also pass the increased cost on to consumers.

Often, goods from abroad are cheaper because they offer cheaper capital or labor costs. If those goods become more expensive, then consumers will choose the relatively costlier domestic product.

Why Are Tariffs and Trade Barriers Used?

Tariffs are often created to protect infant industries and developing economies but are also used by more advanced economies with developed industries. Here are five of the top reasons tariffs are used.

Protecting Domestic Employment

The levying of tariffs is often highly politicized. The possibility of increased competition from imported goods can threaten domestic industries. These domestic companies may fire workers or shift production abroad to cut costs, which means higher unemployment and a less happy electorate.

The unemployment argument often shifts to domestic industries complaining about cheap foreign labor, and how poor working conditions and lack of regulation allow foreign companies to produce goods more cheaply. In economics, however, countries will continue to produce goods until they no longer have a comparative advantage (not to be confused with an absolute advantage).

Protecting Consumers

A government may levy a tariff on products that it feels could endanger its population. For example, a country may place a tariff on imported beef if it thinks that the goods could be tainted with a disease.

Infant Industries

The use of tariffs to protect infant industries can be seen by the Import Substitution Industrialization (ISI) strategy employed by many developing nations. The government of a developing economy will levy tariffs on imported goods in industries in which it wants to foster growth.

This increases the prices of imported goods and creates a domestic market for domestically produced goods while protecting those industries from being forced out by more competitive pricing. It decreases unemployment and allows developing countries to shift from agricultural products to finished goods.

Criticisms of this sort of protectionist strategy revolve around the cost of subsidizing the development of infant industries. If an industry develops without competition, it could wind up producing lower quality goods, and the subsidies required to keep the state-backed industry afloat could sap economic growth.

National Security

Barriers are also employed by developed countries to protect certain industries that are deemed strategically important, such as those supporting national security. Defense industries are often viewed as vital to state interests, and often enjoy significant levels of protection.

For example, while both Western Europe and the United States are industrialized, both are very protective of defense-oriented companies. 

Retaliation

Countries may also set tariffs as a retaliation technique if they think that a trading partner has not played by the rules. For example, if France believes that the United States has allowed its wine producers to call its domestically produced sparkling wines “Champagne” (a name specific to the Champagne region of France) for too long, it may levy a tariff on imported goods from the United States.

If the U.S. agrees to crack down on the improper labeling, France is likely to stop its retaliation. Retaliation can also be employed if a trading partner goes against the government’s foreign policy objectives.

Common Types of Tariffs

There are several types of tariffs and barriers that a government can employ:

• Specific tariffs
• Ad valorem tariffs
• Licenses
• Import quotas
• Voluntary export restraints
• Local content requirements

Specific Tariffs

A fixed fee levied on one unit of an imported good is referred to as a specific tariff. This tariff can vary according to the type of goods imported. For example, a country could levy a $15 tariff on each pair of shoes imported, but levy a $300 tariff on each computer imported.

Ad Valorem Tariffs

The phrase “ad valorem” is Latin for “according to value,” and this type of tariff is levied on a good based on a percentage of that good’s value. An example of an ad valorem tariff would be a 15% tariff levied by Japan on U.S. automobiles.

The 15% is a price increase on the value of the automobile, so a $40,000 vehicle now costs $46,000 for Japanese consumers. This price increase protects domestic producers from being undercut but also keeps prices artificially high for Japanese car shoppers.

Non-Tariff Barriers to Trade

Licenses

A license is granted to a business by the government and allows the business to import a certain type of good into the country. For example, there could be a restriction on imported cheese, and licenses would be granted to certain companies, allowing them to act as importers. This creates a restriction on competition and increases prices for consumers.

Import Quotas

An import quota is a restriction placed on the amount of a particular good that can be imported. This sort of barrier is often associated with the issuance of licenses. For example, a country may place a quota on the volume of imported citrus fruit that is allowed.

Voluntary Export Restraints (VER)

This type of trade barrier is “voluntary” in that it is created by the exporting country rather than the importing one. A voluntary export restraint (VER) is usually levied at the behest of the importing country and could be accompanied by a reciprocal VER.

For example, Brazil could place a VER on the exportation of sugar to Canada, based on a request by Canada. Canada could then place a VER on the exportation of coal to Brazil. This increases the price of both coal and sugar but protects the domestic industries.

Local Content Requirement

Instead of placing a quota on the number of goods that can be imported, the government can require that a certain percentage of a good be made domestically. The restriction can be a percentage of the good itself or a percentage of the value of the good.

For example, a restriction on the import of computers might say that 25% of the pieces used to make the computer are made domestically, or can say that 15% of the value of the good must come from domestically produced components.

Who Benefits From Tariffs?

The benefits of tariffs are uneven. Because a tariff is a tax, the government will see increased revenue as imports enter the domestic market. Domestic industries also benefit from a reduction in competition, since import prices are artificially inflated.

Unfortunately for consumers—both individual consumers and businesses—higher import prices mean higher prices for goods. If the price of steel is inflated due to tariffs, individual consumers pay more for products using steel, and businesses pay more for steel that they use to make goods.

In short, tariffs and trade barriers tend to be pro-producer and anti-consumer.

Note

The U.S. has suspended tariffs on imports of steel and aluminum from the European Union. The suspension will last until Dec. 31, 2025.

The effect of tariffs and trade barriers on businesses, consumers, and the government shifts over time. In the short run, higher prices for goods can reduce consumption by individual consumers and by businesses. During this period, some businesses will profit, and the government will see an increase in revenue from duties.

In the long term, these businesses may see a decline in efficiency due to a lack of competition, and may also see a reduction in profits due to the emergence of substitutes for their products. For the government, the long-term effect of subsidies is an increase in the demand for public services, since increased prices, especially in foodstuffs, leave less disposable income.

How Do Tariffs Affect Prices?

Tariffs increase the prices of imported goods. Because of this, domestic producers are not forced to reduce their prices from increased competition, and domestic consumers are left paying higher prices as a result. Tariffs also reduce efficiencies by allowing companies that would not exist in a more competitive market to remain open.

The figure below illustrates the effects of world trade without the presence of a tariff. In the graph, DS means domestic supply and DD means domestic demand. The price of goods at home is found at price P, while the world price is found at P*.

At a lower price, domestic consumers will consume Qw worth of goods, but because the home country can only produce up to Qd, it must import Qw-Qd worth of goods.

When a tariff or other price-increasing policy is put in place, the effect is to increase prices and limit the volume of imports. In the figure below, price increases from the non-tariff P* to P’. Because the price has increased, more domestic companies are willing to produce the good, so Qd moves right. This also shifts Qw left. The overall effect is a reduction in imports, increased domestic production, and higher consumer prices.

What Are the Main Types of Trade Barriers?

The main types of trade barriers used by countries seeking a protectionist policy or as a form of retaliatory trade barriers are subsidies, standardization, tariffs, quotas, and licenses. Each of these either makes foreign goods more expensive in domestic markets or limits the supply of foreign goods in domestic markets.

What Is an Example of a Tariff?

An example of a tariff would be a tax on a good imported from another country. For example, a 3% tariff on corn would be a 3% tax added to the cost of corn paid by any domestic importer of corn from a foreign country. This would increase the cost of importing corn, resulting in an increase in the price of corn being sold domestically by the importer in order to cover the costs and earn a profit. This hurts domestic consumers as well as businesses, as consumers may look for cheaper competitors that are selling domestic corn and not the more expensive imported corn.

Do Tariffs Cause Inflation?

Theoretically, tariffs can cause inflation. Tariffs increase the price of goods and services in domestic markets by applying a tax on imported goods that is paid by the domestic importer. To cover the increased costs, the domestic importer then charges higher prices for the goods and services. Tariffs are typically applied to specific products or industries, so may not have a wide-scale effect, which, otherwise, would cause all prices to increase, resulting in inflation.

The Bottom Line

The role tariffs play in international trade has declined in modern times, though there are exceptions, like President Trump’s February 2025 tariffs on Mexico, Canada, and China.

One of the primary reasons for the overall decline is the introduction of international organizations designed to improve globalization and free trade, such as the World Trade Organization (WTO). Such organizations make it more difficult for a country to levy tariffs and taxes on imported goods, and can reduce the likelihood of retaliatory taxes. Because of this, countries have shifted to non-tariff barriers, such as quotas and export restraints.

Administration policies can impact the stock market in many ways

Reviewed by Charles Potters

Presidents get a lot of the blame and take a lot of the credit for stock market performance while in office. However, a president’s ability to impact the economy and markets is generally indirect and marginal.

Congress sets tax rates, passes spending bills, and writes laws regulating the economy. That said, there are some ways that the president can affect the economy and the market.

Key Takeaways

• Presidents have very little impact on the stock market, but they still seem to get some credit when performance is good and more of the blame if markets are down.
• Typically, Congress and the Federal Reserve play a bigger role in directly shaping markets when compared to the president.
• Fiscal spending legislation passed by Congress can influence market sentiment.
• The independent Federal Reserve can have a significant impact by raising (bearish) or lowering (bullish) interest rates.
• Bullish stock market sentiment can improve a president’s popularity, while a bearish stock market outlook can undermine a president’s standing.

How Presidents Impact the Stock Market

Because the president is responsible for implementing and enforcing laws, they have some control over business and market regulation. This control can be direct or through the president’s ability to appoint cabinet secretaries, such as the head of the Department of Commerce, as well as trade representatives.

The president also nominates the Chair of the Federal Reserve, who sets monetary policy along with the other Fed governors and members of the Federal Open Market Committee. The Fed is an independent government body with a mission to set monetary policy that ensures economic growth, low inflation, and low unemployment.

Those monetary policy measures can impact the stock market, although the Fed typically does not consider the performance of the stock market as an isolated factor to influence its decisions. The extent to which the person picked as Fed Chair is hawkish or dovish on monetary policy will determine how they affect the economy.

All presidents would like to lead during economic expansion and a rising stock market because those usually increase their likelihood of reelection. As President Bill Clinton’s campaign manager, James Carville, once famously said, “It’s the economy, stupid.”

This chart shows the S&P 500’s price change over each four-year presidential term going back to 1953. Two of the terms have two names because President Kennedy was assassinated before the end of his term, and President Nixon resigned before the end of his second term. Their terms were finished by their vice presidents, Lyndon Johnson and Gerald Ford, respectively.

CEO Presidents

There haven’t technically been any CEOs who went on to become president. In fact, Donald Trump may be the closest contender to claim that title. He was chair and president of The Trump Organization before becoming President of the United States. Many have tried, and we’ll likely see more attempts in the future.

Presidents and the NYSE

A sitting president will rarely visit the New York Stock Exchange. Sure, President George Washington’s statue is right across the street at Federal Hall, but the exchange was barely established during his tenure.

On Jan. 31, 2007, President George W. Bush visited the New York Stock Exchange. He had just made a speech on the economy across the street at the aforementioned Federal Hall, where he chastised corporations for excessive executive compensation. Little did he know, the nation was about to slip into a financial crisis and the longest recession it had experienced since the Great Depression.

S&P 500 Under Biden

Under President Biden, the S&P 500 had a choppy ride at first but made record gains in 2024.

Biden took office in January 2021 as markets were still rebounding from the losses suffered due to the COVID-19 pandemic. After initially topping out in January 2022, the S&P was buffeted by interest rate hikes as the Fed sought to restrain inflation. Rising interest rates caused the index to fall for most of 2022. Throughout 2023, the market showed increased volatility as market participants speculated on the size and timing of further Fed rate hikes.

After the Fed signaled an end to rate hikes, the S&P began to climb, breaking 5,000 for the first time in February 2024. It continued to rise steadily, peaking in July 2024 and then breaking through 6,000 in December.

Does It Matter Who Is President For Stock Market Performance?

No. History shows that neither party affiliation, nor who the incumbent is, has any direct effect on the performance of stocks.

Do Government Policies Have an Effect on Stock Market Performance?

Yes, government policies can have an effect on stock market performance, especially to the extent that they deliver large fiscal spending programs. Market investors view extra government spending as a boon to consumers and then to the market.

Do Tax Cuts Count As Fiscal Spending?

Tax cuts are a form of fiscal stimulus since they leave more money in consumers’ pockets, which drives personal spending and a generally bullish sentiment among investors.

Do the Policies of the Fed Impact the Performance of the Stock Market?

Yes. The Federal Reserve is an independent government body that sets monetary policy by raising or lowering interest rates, among its main tools. Higher interest rates, or speculation on them, generally have a bearish impact on stocks. The thinking is that higher rates will raise the cost of borrowing and act as a headwind to the overall economy. Lowering interest rates can have the opposite effect unless monetary policy easing is due to a weak economy.

The Bottom Line

While the president can influence the economy through policies and economic agendas that can impact the stock market, the president probably gets too much blame and too much credit when it goes down or up. That’s because larger macro events generally drive investment sentiment over the longer term.

A strong or bullish stock market, by raising consumer optimism, can redound the president’s popularity and may benefit the incumbent come election time. The same can be said if the stock market is down and investor sentiment is bearish, auguring poorly for the incumbent at voting time. So it could be said that stock market performance has a bigger influence on who is president, rather than the other way around.

Fact checked by Vikki Velasquez
Reviewed by Gordon Scott

Adriana Kugler is an economist and a member of the Federal Reserve’s Board of Governors. She previously served as the U.S. executive director of the World Bank, a position for which she was nominated by President Joe Biden in August 2021 and confirmed by the U.S. Senate in April 2022. She also is a professor of public policy and economics at Georgetown University, where she is on a leave of absence.

Kugler left the World Bank to become a member of the Federal Reserve’s Board of Governors. Nominated by Biden in May 2023 and confirmed by the U.S. Senate on Sept. 7, 2023, she is the board’s first Latina member. She filled an unexpired term which will end on January 31, 2026.

Key Takeaways

• Adriana Kugler is a highly accomplished labor economist and professor with experience in both academia and public policy.
• Kugler was appointed to the Federal Reserve’s Board of Governors by President Joe Biden, filling an unexpired term than will end in 2026.
• In public policy, Kugler has served as chief economist of the U.S. Department of Labor and as a senior economist at the World Bank.
• Kugler is on leave from a senior position at Georgetown University to focus on public policy and serve as one of the Fed’s Board of Governors.

Early Life and Education

Adriana Kugler was born in the United States. She grew up in Colombia, where her parents were involved in social projects (her father was an economist who worked with the World Bank). Her experiences observing poverty, homelessness, child labor, poor infrastructure, and the lack of basic necessities such as drinking water and electricity led to an interest in economics and political science. She decided to pursue a bachelor’s degree in those fields at McGill University in Montreal, where she graduated with first class joint honors in 1991.

Kugler then pursued a doctoral degree in economics at the University of California at Berkeley, where she studied under the supervision of Nobel laureate George Akerlof, husband of Janet Yellen, the current U.S. Secretary of the Treasury. Her dissertation focused on labor economics, development economics, and applied econometrics. She completed her Ph.D. in 1997.

Academic Positions

Kugler has held professorships at numerous prestigious institutions, including Harvard University, the London School of Economics, and Georgetown University. Her research has primarily focused on labor markets, public policy, and the impact of globalization on the workforce. Here is a time line of her academic appointments:

• 1997 to 2003: Assistant professor of economics at Pompeu Fabra University in Barcelona, Spain
• 2003 to 2005: Associate professor of economics at Pompeu Fabra University in Barcelona, Spain
• 2005 to 2009: Associate professor of economics at the University of Houston in Texas
• 2009 to 2010: Full professor of economics at the University of Houston in Texas
• 2010 to present: Full professor of public policy and economics at Georgetown University in Washington, D.C. (on leave of absence since 2022)
• 2013 to 2016: Vice provost for faculty at Georgetown University in Washington, D.C.

In addition to her academic appointments, Kugler has been affiliated with various research organizations and networks as a research associate, research fellow, senior fellow, or board member. Some of these include:

• National Bureau of Economic Research (NBER) in the Labor Studies program
• Centre for Economic Policy Research (CEPR) in London
• Center for American Progress

Kugler also has served on the editorial boards of several academic journals and publications in the fields of economics, public policy, labor relations, and development.

Public Policy Positions

In the realm of public policy, Kugler has held high-level positions in both national and international organizations. Notably, she served as chief economist of the U.S. Department of Labor during the Obama administration and as a senior economist at the World Bank.

Her expertise in labor economics and policy has made her a sought-after consultant and speaker in global economic forums.

• 2011 to 2013: Chief economist, U.S. Department of Labor, Obama administration
• 2020: Chair, Business and Economics Section, American Statistical Association
• 2022 to 2023: U.S. executive director, the World Bank
• 2023 to present: Member of the Board of Governors of the Federal Reserve System

Federal Reserve’s Board of Governors Nomination

In May 2023 President Biden announced his intention to nominate Kugler for a seat on the Federal Reserve’s Board of Governors, the governing body of the Federal Reserve System, which is the central bank of the U.S. Confirmed by the Senate in September 2023, Kugler filled a vacancy on the board created when Lael Brainard became Biden’s director of the National Economic Council.

The Federal Reserve Board of Governors consists of seven members who are appointed by the U.S. president and confirmed by the Senate for four-year terms. The board oversees the operations of the Federal Reserve banks, sets monetary policy, regulates banks and financial institutions, and provides financial services to the government and the public.

Important

Concurrent with his selection of Kugler, President Biden nominated Philip Jefferson for promotion to the role of vice chair of the Federal Reserve’s Board of Governors. Jefferson is a Black economist who has been serving as a Fed governor since 2022, when he was appointed by Biden and confirmed by the Senate. Jefferson took office on September 13, 2023 and is the second-ever Black vice chair of the Fed, following Roger Ferguson, who served from 1997 to 2006.

Kugler is the first Latina economist to serve on the board. Her appointment not only broke barriers for women and minorities in the field of economics; it also sent a strong message about the Biden administration’s commitment to diversity and representation in key policymaking institutions.

As a member of the Board of Governors, Kugler can call on her expertise and experience in labor economics and public policy to influence the Fed’s decision-making process on monetary policy and financial regulation. She also contributes to the Fed’s research agenda and outreach efforts on topics related to labor markets, unemployment, immigration, and economic development.

How Is the Federal Reserve’s Board of Governors Chosen?

The Board of Governors of the Federal Reserve is made up of seven members. These individuals are nominated by the president and confirmed by the Senate. Each one serves a term of 14 years. A board member may serve only one full term, though a member who fills an unexpired term can be reappointed. Vice Chairs of the Federal Reserve Board are nominated by the U.S. president from among the members of the Federal Reserve Board. The nomination is subject to confirmation by the Senate, and the vice chair serves for a term of four years.

Who Is the Fed Chair?

The chair of the Federal Reserve is Jerome H. Powell. He was sworn in for a second four-year term on May 23, 2022. He assumed the role following his confirmation in February 2018. He succeeded Janet Yellen, who was the first female chair to be appointed and served from 2014 to 2018. She became President Biden’s Treasury Secretary.

Who Are the Current Members of the Fed’s Board of Governors?

The seven individuals who serve on the Board of Governors of the Federal Reserve as of February 2025 are Jerome H. Powell (chair), Philip N. Jefferson (vice chair), Michael S. Barr (vice chair for supervision), Michelle W. Bowman, Lisa D. Cook, Adriana D. Kugler, and Christopher J. Waller.

Is Adriana Kugler Still Executive Director of the World Bank?

No. Kugler stepped down from her position as the U.S. executive director for the World Bank in 2023 to take a seat on the Federal Reserve Board of Governors. She was nominated to both positions by President Joe Biden.

The Bottom Line

Adriana Kugler, a Colombian-American labor economist and former U.S. executive director of the World Bank, was sworn in as a member of the Board of Governors of the Federal Reserve on Sept. 13, 2023. As of her appointment, she was the first Hispanic member of the board in its 109-year history.

In addition to policy roles, Kugler has held several academic positions including senior positions at Georgetown University. She is on leave from her position as a full professor at Georgetown’s McCourt School of Public Policy and Economics to serve on the Board of Governors of the Federal Reserve.