Trade Wars

by John Gugle

We have little doubt the media has caught your attention with recent trade war headlines. No one likes trade friction as it tends to stoke our worst fears of economic calamities. To date, the “trade war” has been more about hypothetical impact that can confuse and worry investors, but it has not yet led to an adverse impact on our economy or our stock market. While concerns fueled by the media may be high, we need to remember how important it is to tune out the noise. We will continue to monitor developments closely and you can count on us to adhere to our disciplined investment process and not make reactionary decisions based on hyperbole and fear.

Our investment philosophy is grounded in compelling academic research that supports that investing in a globally diversified portfolio over the long term gives us the best chance for success. This translates into better returns and less volatility over time than a portfolio only invested in the USA. At any given point in time certain markets may be outperforming, but no one has a crystal ball to know which one will do the best and when. We aim to participate in all markets (tailored to each client’s risk tolerance) in order to take advantage of opportunities as they arise across the globe. Investing over the long run requires global diversification and patience if you want to stand the best chance of meeting all of your financial goals.

At present, year to date the US stock market is outperforming the rest of the world. The US S&P 500 is up 6.18%, the Japan Nikkei 300 is down 3.3%, the German DAX is down 2%, the MSCI Emerging Market Index is down 6.16%, and the Chinese Shanghai Composite is down 15.4%. The US market outperformed global stock markets between 2014 and 2016, but that trend reversed in 2017 when global stock markets took the lead. Some of these results can be attributed to interest rates and global currency changes – these two factors can have a substantial impact on investment returns. Growth trends across stock markets also tend to be cyclical, so we know that trends can reverse quickly. That is why we believe investing globally still offers strong opportunities over the long term. Economic growth in the USA has been accelerating in 2017 and 2018 while growth in Europe, Japan and China has been falling. The US currently has an $850B annual trade deficit against its trading partners that needs to be addressed since it is unsustainable and harmful to long term economic security. If that trade deficit can be reduced, the US economy stands a better chance of strengthening and creating more jobs for Americans.

We understand that it is easy to feel overwhelmed by the relentless stream of news about markets. Being bombarded with data and headlines presented as “impactful to your financial well-being” can evoke strong emotional responses from even the most experienced investors. Headlines from the “lost decade” (from 1999-2009) can help illustrate several periods that may have led market participants to question their approach.

  • May 1999: Dow Jones Industrial Average Closes Above 11,000 for the First Time
  • March 2000: Nasdaq Stock Exchange Index Reaches an All-Time High of 5,048
  • April 2000: In Less Than a Month, Nearly a Trillion Dollars of Stock Value Evaporates
  • October 2002: Nasdaq Hits a Bear-Market Low of 1,114
  • September 2005: Home Prices Post Record Gains
  • September 2008: Lehman Files for Bankruptcy, Merrill Is Sold

While these events are now a decade or more behind us, they can still serve as an important reminder for investors today. For many, feelings of elation or despair can accompany headlines like these. We should remember that it is normal for markets to be volatile. We recognize that, in the moment, doing nothing may feel paralyzing (and against our “reptilian brain” that screams “do something!”), but those who have stayed the course in the past will tell you they are glad they did. When faced with short-term noise, it is easy to lose sight of the potential long-term benefits of staying invested. While no one has a crystal ball, adopting and adhering to a long-term perspective can help change how we view market volatility and help us all look beyond the headlines and trying to time markets.

We invite you to take a few moments to view this video that will hopefully help you put the “trade war”, which is front and center, into perspective. It may even take you down memory lane…enjoy.

Video: Tuning Out the Noise