The apparent escalating trade war between the U.S. and China has been on the minds of many investors this week. Last Monday, the S&P 500 fell 2.4 percent, and the Nasdaq experienced its worst day of the year. On Tuesday, stocks rebounded as President Trump sought to downplay what he termed a “little squabble with China.” But the uncertainty continues, and uncertainty tends to make investors nervous.
When stories like the U.S.’s trade tensions with China make the news, it’s common for people to want to understand how they – and their portfolios – might be affected. So, let’s start with examining what a tariff is and how it is collected. In short, a tariff is a fee (some also call it a tax, duty or levy) that an importer pays when purchasing goods from another country. Tariffs often get passed on to consumers who ultimately buy those products through increased prices. Governments impose tariffs on goods from other countries for a variety of reasons, including to raise money or to protect domestic industries. President Trump has accused China of taking advantage of the U.S., and has said he is using tariffs as a negotiating strategy to secure a more favorable trade agreement.
If you listen to economic pundits, an escalating trade war could lead to higher consumer prices for many items. Higher consumer prices could lead Americans to tighten their grip on their wallets, which could cause the economy to slow. Stock prices on Monday reflected those concerns as investors learned of China’s plans to retaliate against the Trump administration’s plans to implement new tariffs. Until the “squabble” is settled, we may see even more volatility as the markets roll with the punches.
“Tariff-Proofing” Your Portfolio
Along with news of the trade war this week comes speculation about how investors can best seize buying opportunities, or at least insulate their portfolios, from the effects of any ongoing trade tensions. In my opinion, the best strategy – always – is to maintain a globally diversified portfolio, to exercise discipline during times of volatility, and to focus on the long term (in short, the approach we take with all of our clients).
A well-diversified global portfolio can help capture the returns of markets around the world and deliver more reliable outcomes over time. (Click to tweet!)
Let’s face it. Market performance is random. But as Eugene Fama, the father of efficient market hypothesis and a Nobel laureate, and Kenneth French, an economics expert and distinguished professor of finance at Dartmouth, point out, market volatility often increases after a decline in stock prices, which may increase expected returns. So when pundits encourage investors to “sell now,” they may be reflecting on the past, not the future.
News = Noise
It’s not uncommon for news headlines to affect short-term market performance, but an examination of the S&P 500 Index from 1926-2018 shows that the annualized return has been about 10 percent, even though in some years, the return has been much higher or much lower. In fact, over the last 93 years, returns were negative about 25 percent of the time. But on the flip side, that means that 75 percent of the time, investors saw a positive return. If you stay disciplined and resist trading based on emotion, the evidence suggests you’ll see higher returns over time.
While today’s 24-hour news cycles provide a lot of fodder for anxiety, just remember that nobody can predict the future. Instead of reacting to the headlines, remember your financial goals and your plan to achieve them, because in that way, you’ve already tariff-proofed your portfolio! Now, change the channel, stop reading the news sites, and take a deep breath. If you have questions or concerns, please feel free to contact us. We’d be glad to help.