Inflation fears, rising rates, tariff talks…should I be worried?
As many investors opened their account statements for the month of January all was well in the world of investing. The equity markets (more specifically the S&P 500, which is the most commonly used index when discussing the US stock market) had just come off a terrific year following President Trump’s first full year in office and posted an impressive +21.83% return. The beginning of 2018 started off with a bang. Investors experienced a strong start with the S&P 500 posting an additional +5.62% gain in January…and then came February and March.
February saw the DJIA (Dow Jones Industrial Average) plummet 3,200 points, approximately 12%, in a two-week time period stemmed by inflation fears and the possibility of an overheating economy. In March between a Fed rate hike and the Trump tariff talks, the markets continued to see incredible volatility. President Trump openly talked about his displeasure with many of our trading partners across the globe during his campaign. China was the main country in Trumps crosshairs (I can see the Alec Baldwin SNL bits now) and the potential of imposed sanctions against the world’s second largest economy created a great deal of unrest in the markets. With the president threatening trade sanctions not only against China, but also with our other trading partners across the world, a great deal of uncertainty was injected into the global equity markets and global economy.
Michael Sheldon, Chief Investment Officer of RDM Financial Group was recently quoted as saying “Higher tariffs on China would act like a tax and likely raise the prices of various goods that we import that could hurt U.S. consumers. And if China responds to U.S. tariffs with their own round of tariffs, that would likely hurt U.S. exporters and reduce the outlook for U.S. corporate profits.” The punchline is that the overall economy along with the equity markets could suffer. China is also the largest holder of US Treasurys with just over 1.2 trillion as of February. If China decided to sell a portion of these bonds in hopes of punishing the US, that would likely throw the fixed income markets into chaos – at least for a time. This is an unlikely scenario as that would almost certainly lower the value of US Treasurys that they still own. Shooting yourself in the foot last time I checked is never the best course of action.
Stock market gyrations and bond market uncertainty don’t sound like the most inviting of investing environments! However, as Warren Buffett once said, “be fearful when others are greedy and greedy when others are fearful.” What should all this really mean for you and your portfolio if you have a longer runway of investing ahead of you? Honestly, probably not too much. You don’t have to be a historian to remember that the investing landscape has been riddled with reasons why ‘not to invest’ for years! Let’s go down memory lane for a few of the more notable events since 2000. We saw the dot-com bubble burst in April of 2000, the horrific terrorist attacks in September of 2001, the 2002 stock market crash, the subprime housing crisis of 2007 and 2008 and the recession that followed, US debt was downgraded in April of 2011 from AAA to AA, in June of 2016 the UK voted to leave the European Union, and the list goes on and on. Yet, here we sit at close to all-time highs in the equity markets.
Markets are going to have pockets of gyrations over time and those times should NOT be taken lightly. That said, it is important to not let these shorter-term events dictate your longer-term views concerning your investments. I would recommend putting your mental energy towards things you can control, such as developing a good plan with your trusted advisors, knowing your asset allocation, understanding what you own and why you own it in addition to identifying where you are taking your risks and what your return assumptions are for taking said risk. Last, but certainly not least, make sure your assets are allocated appropriately for you and your family with your longer term financial and life goals in mind.
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