Throughout this year investors had been largely betting on a U.S-China trade deal soon. The S&P 500 posted its worst week of this year after a rout earlier in the week, according to Yahoo Finance, May 10, 2019. On the same day, the Trump administration raised tariffs on Chinese imports more than doubling the tariffs on $200 billion worth of goods from 10%, which had been in effect since last year, to 25%.
After leaving the Office of the U.S. Trade there was no agreement reached between negotiators from China and the White House officials. Indeed there are no further talks planned at this time. Yet after opening in the red the market closed in the green on the second Friday in May. What happened for the dramatic turnaround?
Why it’s the positive news, of course. Losses were pared after Steven Mnuchin, U.S. Treasury Secretary offered no proof but more promise that the China trade talks were “constructive.” Meanwhile, China has declared they will respond in kind to new U.S. tariffs that took effect. One of the tools available to Chinese officials is the ability to devalue the yuan to offset the economic impact of U.S. duties. China also owns $1.1 trillion of U.S. government debt, reports Yahoo Finance, May 10, 2019. From the same source, “ If the country pared back its holdings in $15.9 trillion asset class, that could be a potent weapon.”
On Friday investors bought the rumor. On Monday, May 13, 20019 investors sold the news after China retaliated by raising tariffs on $60 billion of U.S. goods starting June 1, according to CNBC. Investors aren’t buying the happy talk from the administration and within an hour of opening Monday the DOW dropped 600 points with the tariff hikes on the same show.
As you watch this slow moving train wreck, keep your eye on the sale of U.S Treasuries as there could be a slowing or halting of demand. Also, on this side of the world, China tariffs could add $2,500 to average car prices said John Murphy, Bank of America, on CNBC’s “Closing Bell,” May 10, 2019. At this time there is no concrete evidence that things will get a lot worse. At the same time, trade wars are a lot like playing with fireworks. Imagine everyone on your block enjoying the fireworks you displayed. Then you wake up at 3:00 am to find it’s your house on fire.
Speaking of unintended consequences, as we have covered before, my good friend, history buff, and economist Charles Sizemore, Ph.D. asserts it was the 1930 Smoot-Hawley Tariff Act where President Truman raised 40-48% U.S. tariffs on over 20,000 imported goods that caused the U.S. to go from a serious recession into the Great Depression. I am less interested in calling out the current trade war will turn out than I am in preparing for the good, the bad, and the unforeseen in 2019. Desperate times calls for common sense measures.
1. Since no one knows how low the market could go, don’t worry, be strategic. And since hope is not a strategy, use new tech tools on your own or ask your advisor to help you determine how much loss you can accept. For example, click on Risk-O- Meter at www.whybepoor.com or go here, https://www.westlakefinancialadvisors.com/riskalyze/
2. When we fail to learn from the past we often repeat it. Look to see how your portfolio performed 9/21/18 to 12/24/18 when the market was off 20%. If your account experienced a similar loss that could be a sign that when the market gets ugly again your account may fully participate in the next serious decline.
3. Discover how to add risk off/risk on strategies to all risk assets. Instead of holding shares in 2008 and fully participating in that severe loss you wanted to take advantage of the companies that ask this question daily when looking at your specific account. Are we adding fuel to this fire today or do we need to put water on this fire right now? As 2008 turned more volatile to the downside you want to see that your strategists moved out of risk assets to cash, limiting your losses. When volatility became your friend starting April 2009 you wanted your portfolio over time to move out of cash back into risk assets. You want to see how you could have limited your losses in 2008 to 20% or less. In 2009 you want to enjoy all of the market gains for the year. Instead of taking over 4 years to get back to even investors who employed such strategies were happy to see their accounts were back to their 1/1/08 values in 2 years.
4. Add asset classes to your traditional stock & bond portfolio that is typically 60/40. Instead of holding just 2 asset classes diversify like crazy adding more legs under your portfolio stool. Endowments and foundations, for example, often hold 6-8 asset classes. Success leaves clues so follow above average examples as appropriate for you to smooth out your ride no matter how uncomfortable the road ahead become.
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