After years of a significant run-up in the markets, 2018 has been full of volatility. Maybe these trade wars are for real, maybe it’s the tension in the oil markets, whatever is causing the ups and downs it certainly has been more of a gradual decline than what we have seen in the past. But what are the reactions we see? People start talking, you start questioning your strategy, you start thinking … maybe this is it, this is the time to get out, maybe I should get out while I’m ahead!
The way I see it, it is more of a healthy pullback more than anything else. When you look at the fundamentals, there is still room for more growth. If anything, this is the time to be adding more to your investments, not worrying about what to sell.
The Trade Wars
Is it a big deal or not? As we all know, Trump has been focused on protectionist policies. Historically, protectionism has not been a policy that has led to great growth or outcomes so you can imagine the apprehension that we feel here in the US, not to mention what other countries are feeling. There’s no question our trading relationships were set up for a different time in history so now when you go in and try to update these relationships, it’s hard to do without creating a lot of unease. Whether we’re headed into destructive protectionism, time will tell.
Businesses like predictability and that predictability factor is going to continue to go down the longer these trade wars are going on. Foreign companies are getting hurt because they trusted the US and now we’re changing our minds about certain things without a whole lot of notice. Money makes the world go ‘round and now that they’re losing money because of these potential changes, there is a lot of hesitation which is what you’re seeing in the markets now.
I try to stay away from politics but love him or hate him, the fact that Trump isn’t a career politician is what makes him so great as POTUS right now. I wouldn’t necessarily call him conservative or liberal, he’s pragmatic. He doesn’t see problems as liberal problems or conservative problems, he sees them as American’s problem and focuses on solutions without a political agenda. Nobody knows how this administration is going to move forward so you’re seeing that many countries don’t know how to react as they may have in the past. You can’t really threaten him because who knows if he may go off the deep-end. I saw that jokingly of course, but really, who knows what Trump will do?
What to Expect
Besides what is happening with the whole trade war fiasco, another concern is the debt levels that are rising across federal, state, and household balance sheets in this rising rate environment. Which means debt becomes more expensive to service. Is it something to worry about right now?
Again, I think it is reasonable to expect growth over the next year but to remain cautious. Even though the economy and stock market are related, they are still very separate. Where on the economy side we’re definitely seeing a potential for slowing with the rising debt levels and decrease in investment for future productivity, on the market side we’re seeing a lot of share buybacks. When companies are no longer able to do that, that’s when we’ll see things get a bit ugly in the markets.
Regardless of how things are going to play out, the most important thing individual investors can do is head into these markets with a proper asset allocation based on their risk tolerance and goals, rebalance, and not react to day to day market news.