Tariffs, Rome, Bonds, and Helplessness
With the introduction of a new administration there are bound to be things that drive some people crazy and which others will love, and vice versa. That’s politics.
Our job isn’t to litigate every policy; but, rather, we aim to live in the current moment, under the current reality and help people make financial choices which align with what they want to accomplish with their time and money.
…And a new reality which seems to be affecting market sentiment lately is tariffs. So, let’s talk about it.
At first glance, tariffs might sound like a straightforward economic tool: they make foreign goods more expensive, which, in theory, encourages domestic production. But markets are complex, and the actual impact of tariffs on stocks isn’t always what you might expect.
To get a sense of how markets respond to tariffs, we can look back at President Trump’s first term:
Beginning in 2017, his administration focused on China, and by 2018, tariffs were placed on a wide range of Chinese goods. What followed was a period of uncertainty, as trade negotiations dragged on, and tariffs remained in place even after an agreement was reached.
Despite all the back-and-forth, the stock market didn’t collapse under the weight of trade tensions. In fact, from 2017 to 2020, both U.S. and Chinese stock markets posted higher cumulative returns than the MSCI World ex USA Index, which tracks developed markets outside the U.S. This suggests that while tariffs created headlines and short-term volatility, they didn’t derail broader market growth.
Here’s a visual:
Although the above paints a general upward-trending picture, it’s worth remembering that within the 2017 to 2020 period, we saw a near 20% decline for the S&P 500 at the end of 2018.
This precipitous drop started in October 2018 and I distinctly remember fielding a call from a concerned client about 2 months later on Christmas Eve.
I told them the same thing I’m going to tell you now:
“The money you have invested isn’t for you to spend next week, next month, next year, or even 5 years from now. If you do need money in the short term then we shouldn’t own stocks….
We have to avoid letting short term chaos affect long term decisions.”
And then, as the market always has, it recovered in 2019.
Then in 2020 we saw another crisis (Coronavirus) and decline with another recovery.
In 2022 we saw another crisis (4 decade high inflation, worst bond market ever) and another recovery.
Right now the market is just about 6% down from it’s all time high… And while I’m not apathetic to your concern, the existing drop hardly registers on my Panic Meter. Frankly, the shit that you, me, and the rest of our clients have been through over the last 10-15 years makes a tariff-led dip seem like nothing.
Remember what you’ve accomplished by not panicking and honor your progress by continuing to stay level-headed. You can do it. We’re here to help.
Some ideas for you
With all the above said, hearing us, an “expert” tell you “do nothing” is wildly unsatisfying. We get that.
So, here are some thoughts.
We’ve been an advocate of globally diversified stock portfolios for a LONG time. Seriously. If we were around during the time of the Roman Empire (27 BC – 476AD) I would’ve been encouraging them to avoid concentrating power in Rome and instead add a few Senators to the Han Dynasty in China for, you know, diversification purposes.
Tip #1: If you’re worried about chaos in Rome, maybe don’t only invest in Roman stuff.
Below is a YTD performance chart of the US Markets (S&P 500, Dow Jones Industrial Average, and Nasdaq Composite) alongside International Developed Markets (MSCI EAFE) and Emerging Markets.
While the US markets are negative YTD, the foreign markets (the pink and green lines) are positive thus far.
The chart above includes another line I didn’t mention. See the brown one? That’s the aggregate US bond market.
With interest rates having risen dramatically in 2022, we now have a decent climate for owning bonds as a hedge to stock market risk. Before (when interest rates were barely above 0%), there was seemingly nowhere for them to go aside from Up. But now, if the economy needs stimulus there is room for policymakers to lower rates in pursuit of growth.
When rates go down, bond prices usually go up.
Tip #2: Take a fresh look at your asset allocation. If you must hedge some stock market volatility, bonds may be a reasonable place to start.
With the above tip noted, bond prices are negatively impacted by rising rates…
…And rates often rise in response to inflation.
…And inflation may rise in response to tariffs.
So, be careful as you craft your bond portfolio and try to ensure you’re not swapping too much stock market risk for interest rate/inflation risk.
And finally, one last tip:
Tip #3: The news is not your friend.
If you walked down the street on March 4th of last year and then again today, I don’t think you’d notice a difference in the world around you. But if you watched your preferred news channel a year ago and then again today, you may either feel excited or despondent based on who’s in power. The news isn’t your friend.
I’m begging you to live life in your own house first. Then in your neighborhood. Then in your city. Then state. Then country. Then global community.
This is the order of things you can influence, and you disproportionately focus your emotional energy on things happening outside of your direct influence, the resulting feeling is often helplessness. That’s a shitty feeling.
My focal point for every client we work with is empowerment. Specifically, I want you to feel like you’re in control of your time and that your money is working to produce the life you want. Avoiding the feeling of helplessness over situations you can’t influence is good for your mental health.
Okay, enough grandstanding from me on this. I have a three week old baby’s diaper to change.
Until next time,
Adam Harding
Lead @ Harding Wealth | CFP® | Smartvestor Pro
(480) 205 -1743
*For informational purposes only. Not investment, tax, or legal advice.
