During the past week, stock prices dropped sharply on fears the trade dispute between the U.S. and China had escalated.
Investors woke to the news on Monday that the People’s Bank of China had manipulated its currency, allowing the yuan to fall to its lowest level versus the dollar in a decade. A weaker yuan makes Chinese exports less expensive in foreign markets. It can also help offset the impact of U.S. tariffs on Chinese products.
The currency news comes just days after the U.S. announced plans to tax $300 billion of Chinese goods at 10% starting in September. The new round of tariffs are in addition to the existing 25% tariffs imposed on $250 billion in Chinese products. It also comes less than a week after the Federal Reserve lowered short-term interest rates by 0.25%.
The recent selloff has been impactful, and for some, unexpected. Today we saw stocks plunge another 3% for the worst percentage drop of the year. The S&P 500 is now off more than 6% from last month's record high.
Thanks to this evening's round of "tweets," the selling pressure doesn't appear to be over. As it stands now, the futures are down big and Asia is off another 3% at its open. There is a precedent for a large decline preceding another gap down at the open:
10/19/87, 10/10/08, 11/20/08, 8/8/11 and 8/25/15
In each case, the market advanced over the next several trading days. (Of course, the recoveries didn't always hold, but ultimately we moved on to higher highs as time has moved on. Wouldn’t you like to be able to go back and put money to work at any one of these dates compared to where the market stands today? I know I would.)
What may or may not happen next, from a recovery standpoint, will tell us much more about the future than the current "Trade Soap Opera." Remember, the key is not just a selloff or a rebound, but the fundamentals behind it and the characteristics of any rally that may unfold.
There’s a reason they don’t advertise how the sausage is made. If you watched it from beginning to end you wouldn’t buy it and you certainly wouldn’t want to eat it. In effect, right or wrong, our president has decided to open up the “sausage making” of trade negotiations to anyone with a Twitter account. In a perfect world, this wouldn’t happen, but we don’t live in a perfect world.
Leveling the playing field for trade is important. Whether or not the current approach is right will be left up to the history books of the future to decide. We must continue to move forward and not let the noise dissuade us from our ultimate goals. I suspect this is just short-term noise. However, at some stage there will be a catalyst which will drive us into a true bear market and maybe even recession. I suppose this is as good as any, but in case you haven’t noticed corporate America and the U.S. consumer have been doing pretty well.
On days like this I always ask myself “have the fundamentals or the rules of the game changed?” I cannot answer in the affirmative today. As such, I must consider this noise. The news media loves this and will never waste the opportunity to scare you into turning in. My guess is CNBC or the like will air another “Markets In Turmoil” special before this ends. Also know this type of event can take days or weeks to play out. We may not necessarily see a complete snapback in the near term.
For investors of any level, this type of market volatility is unnerving and can make you question your portfolio’s approach. But remember, your financial strategy is based on your goals, your tolerance for risk, and your time horizon. We designed this approach so you never need to make hurried decisions when volatility picks up. Investing in high-quality, proven companies has never been a bad idea.
Now, there may be a situation in the future when you may need to adjust your strategy. This is part of smart investing, but those changes should be driven by your personal situation, not headlines that can cause quick dips and perhaps fast relief.
As financial professionals, we keep a close eye on the markets and watch for any shift that may call for a change in your portfolio. We consult experts on what may be next and work tirelessly to stay atop financial trends, so you can rest easy even when market turbulence hits. This is not our first rodeo, not even the second or the third.
As always, if you have any questions or would like to discuss what the recent market behavior may mean for your investments, don’t hesitate. I’m always more than happy to share whatever timely information on market action I can.
These are the views of FMG Marketing Library, and not necessarily those of Nick Toadvine, or Calton Associates, Inc., and should not be construed as investment advice. Neither Nick Toadvine nor Calton & Associates, Inc. gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your financial advisor for further information.