Trade wars, volatility and the stock market

As President Trump and his administration have discussed placing tariffs on various products, and China has reacted with similar tactics, worldwide stock markets have generally gone down.

First, a quick example of what you should not do. You should not over-react.

Wednesday morning I woke to CNBC reporting that the futures for the DJIA 30 stock index were down more than 600 points in pre-market trading. That represented a decline of 2.5% from the prior day’s close of 24,033.

However, by the end of Wednesday, the DJIA increased nearly 1% for the day. Other indexes were up even more. The broader large company S&P 500 was up 1.16% and the small company Russell 2000 gained 1.42%.

Those who reacted and sold stocks before 2 pm on Wednesday likely lost real money. Those who were patient and did not react to the early am news of the intensifying trade dispute ended the day with nice gains.

What is going on with International trade?

Irrespective of your politics, we are going to start with the assumption that trade should generally be fair and free between all companies and countries. Unfortunately, there is currently not a level playing field between countries. We are not going to deal with the specifics in this post.

How President Trump and other worldwide leaders resolve this issue remains to be seen. There is no way to predict an outcome. US leaders have threatened, but not yet actually imposed any new tariffs. This is an important distinction. No tariff changes have yet to be imposed by either the US or China. Each side has developed lists of products and potential tariffs, but these are all subject to negotiations which could take months to resolve. They will likely continue to add or modify these lists and threats for strategic purposes. For further reading on the topic, see below.***

Whether the actions by the Trump administration are successful in improving the US trading position with China, as well as addressing intellectual property rights, remains to be seen.

In the short term, the loss in stock market value has been significant, but not devastating. No one can accurately predict the long term impact to stocks from the trade battle which is brewing.The trade dispute is causing the stock market to be more volatile.

But let’s look at the word volatility. Volatility actually means when something changes quickly or unpredictably. You didn’t see the words “down,” “loss” or “gain” in that definition.

Volatility does not just mean when the markets suddenly go down.

Most people thought 2017 was NOT volatile because markets generally only went up. Last year was technically quite volatile, based on the true definition, as stocks did change a lot and few predicted the large increases.

Investing in stocks inherently involves volatility, both down and up. You must be prepared for this, for all sorts of reasons, both expected and unexpected. We work with you and structure your portfolio and asset allocation so that you can handle the volatility.

For more on handling volatility, you may want to watch this videoTuning Out the Noise.

Our general investment philosophy emphasizes smaller companies over larger companies more than most traditional financial advisors. We recommend this because historical financial and academic data shows that smaller company stocks outperform larger company stocks, though small companies are inherently more risky.

In terms of the current trade issues, our tilt toward smaller companies could be beneficial, as the impact of the trade dispute, real or threatened, could be a greater negative to larger companies than small companies. Only as an example, a smaller company which sells products primarily in the US or not to China may be impacted less than Boeing, which would be directly affected by potential tariffs on aerospace.

As we often say, it is not beneficial to try to time the markets. That is not a winning long term strategy. So, we do not recommend any significant asset allocation changes in response to these trade issues if your portfolio is properly structured and globally diversified.

Whatever occurs in this trade dispute, we hope that the leaders of all sides consider the impact of their words, positions and actions on their citizens and companies, as well as the global community.

You can be assured that we will provide you with updates, advice and commentary, as it is needed.

If you found this helpful, please feel free to share it with your friends and colleagues.

 

***I highly recommend the WSJ  article”Tariff Showdown Shifts to Intense Negotiation Period,” dated April 4, 2018.

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