Daily Commentary

MarketMinder’s View: The deep reporting here is a good documentation of the worst-case scenario markets have been pricing in as the US and China ratchet up tariffs on each other (to levels that make future hikes rather irrelevant, no less). As it shows from many angles, people fear tariffs will cut off trade between the world’s two largest economies, driving the US economy into recession and truncating China’s recovery from its property bubble, regulatory push and several years of COVID restrictions. High prices in the US and sluggish demand for a sudden glut of unsold goods in China are the alleged culprits. So for markets, the question is: Will reality go better or worse than these worst-case scenarios? We see a high likelihood of better. Consider: While tariffs on China are high, neighboring Vietnam is negotiating a lower reciprocal rate and for now, during the 90-day pause, is in the blanket 10% tariff club. So are other east and southeast Asian hubs. This makes it very easy for goods flowing between the US and China to take a pitstop for repackaging, final assembly, relabeling and a lower tariff rate, just as they did during the first Trump administration. The US and China have effectively sanctioned themselves, which we think is counterproductive, but we have all seen repeatedly for three years now that sanctions don’t stop trade. Russian goods and oil are still finding a way despite all the restrictions against them, which are much greater and more sweeping than the US and China’s barriers against each other. These tariffs will add friction and some costs, but the likelihood they kill trade outright looks very slim.

MarketMinder’s View: Really, you can’t—which this piece tacitly shows in its attempt to pinpoint it. The metrics it encourages leaning on are valuations, bond yields, gold, corporate bond spreads, mutual fund flows, corporate earnings and stocks’ prices relative to their 200-day moving averages. What do these have in common? All are backward-looking, reflecting either past price movement or the fundamental factors that contributed to past price movement. None tell you what will happen from here. There is no signal, no all clear, no nothing. If there were, then someone would have a sterling track record of nailing the top and bottom of every market selloff or correction (or at least many of them), and they would be an absolute living legend. But that person doesn’t exist. Hence, we think it is a bit odd that this piece indirectly encourages investors to try to pop in and out of stocks around short-term swings … especially since it shows there are severe consequences to doing so if you are wrong. Volatility is difficult to endure, especially when the swings in both directions are as massive as they have been the last week and a half. But staying cool and focused on your long-term goals likely remains the wisest move. For more, see this week’s commentary, “Positive Volatility Still Calls for an Even Keel.”

MarketMinder’s View: This piece isn’t perfect, but it offers a great framework to use if you find yourself tempted to make big portfolio changes due to this burst of volatility—whether that is plowing in a bunch of cash to “buy the dip” or yank everything out of stocks to “stop the bleeding.” Before you act, ask yourself the titular four questions. 1, “What do you own and why do you own it?” 2, “Why do you own stocks?” 3, “What has changed?” and 4, “If you didn’t already own this asset, would you buy it at this price?” This should help take you through a thought exercise reminding you of your long-term investing goals and why you selected the strategy to reach them, and remembering that purpose can help you find calm and discipline. Then, it helps you filter out stocks’ short-term moves. In this case: “Do you own [stocks] primarily because you wanted to benefit from the stability of longstanding trade agreements between the U.S. and the rest of the world? Probably not. Most likely, you’ve always owned stocks because you wanted to participate in the long-term growth of the U.S. (and global) economy.” Which, as the article goes on to note, didn’t suddenly become impossible overnight because of tariffs. Those are bad, but they are obstacles businesses can work around. And as for the companies in your portfolio, if the only thing about them that has changed is the price, that isn’t a good reason to sell—past price movement doesn’t predict future returns.