The market’s first quarter performance (S&P 500 Index down 4.3%; globally diversified balanced portfolios down less than 1%) have taken a back seat next to what happened in the following week.
Trade War Erupts
But the big news happened after the end of the quarter, on Wednesday April 2 (so called “Liberation Day”), when President Trump announced the details of the administration’s tariff plans. Triggering three days (so far) of selling. And deepening fears of an imminent recession.
We investment professionals (as opposed to TV pundits) are often at pains to ascribe cause and effect to market movements. Markets go up and down for all kinds of reasons. But there is absolutely no doubt that the last few days were directly caused by the President’s unilateral imposition of across-the-board tariffs, utilizing emergency powers purportedly granted under the International Emergency Economic Powers Act.
President Trump has made a big bet that the enormous pain and costs of these tariffs will be worth it in the long run by reversing the trade imbalances that were brought on by economic globalization over the past half century.
You Don’t Know What’s Going to Happen
And nobody else does either. In some ways this experience feels redolent of the collapse of Bear Stearns in 2008, which preceded the Great Recession. Or will it be more like the relatively short bear markets of 1987, 2020 and 2022?
President Trump has a habit of getting his way. Maybe he’s right — and with patience this will usher in a new Golden Age. Or maybe this is the biggest blunder in economic history, that will bring about an economic “nuclear winter.”
The System Might Work
But there are any number of factors that could reverse this policy:
- There are already rumblings in Congress for legislators to take back their power over customs and duties that has been delegated to the President at least since World War I. Bi partisan legislation has been introduced in the Senate.
- The first lawsuit challenging the executive order has been filed in federal court in Florida.
- President Trump may blink.
What Should Investors Do?
The late Saint Jack Bogle is famous for cautioning investors in these emotional maelstroms to “stay the course.” Don’t just do something, stand there! And it’s easy for our friends at Dimensional funds to suggest, as they do in their excellent new film, that you simply Tune Out the Noise.
But that is only good advice if you are generally on the right course and have prepared for moments like these. The venerable WSJ columnist Jason Zweig has some great and practical suggestions in this piece on how to try to think clearly when the fog of investment war descends. Maybe there’s a sophisticated way to scratch the itch to do something, while not completely tearing apart your plan. He recommends creating a three tier hierarchy of decision making based on the likelihood of regret — and take action first with decisions that you would least likely regret in the long term; such as spending less and saving more. The middle layer would consist of making portfolio changes at the margin. Last of all would be making wholesale changes to your well-thought-out plan that you may come to strongly regret later in life. This is great advice.
If you can keep your head when all about you
Are losing theirs…Yours is the Earth.
Rudyard Kipling
