How the U.S.-China Trade War Affects Investors

June 11, 2019

Everywhere you turn in major media, anything commentators are talking about are the impacts of the U.S.-China trade war. The commentary ranges from discussing how it impacts a specific country (such as the U.S.), what it means for global growth and the economy and how it will affect global markets. Another conversation that has many pundits weighing in, is also how investors should be reacting to this global tension. Personally, my advice to clients is unchanging, especially when you believe in the tenets of long-term and value investing strategies.

Global Impacts

The trade war with China ramped up on May 13, when President Trump raised tarrifs on $200 billion worth of trade goods from China from 10 to 25% escalating the tension further. These tarrifs are not in affect yet, but even this was enough to see a $1 trillion market selloff. When you look at the total effects that this ongoing trade war, you could be excused for getting caught up in the media hype surrounding both the quick selloffs in the market and the ‘scary’ numbers that some pundits are throwing around. What may also be concerning for some is that there is no deal in sight and more retaliation expected to come.

Such as:

  • GDP globally could drop $600 billion in 2021
  • US-GDP could drop 0.5% this year
  • China-GDP could drop 0.8% this year
  • A further market drop of 10%
  • Currency vulnerabilities for re-pricing including the Canadian Dollar

Yet are these numbers abnormal market fluctuations?

History of Turmoil

While investors have enjoyed outsized gains since the Great Financial Crisis with lower volatility up until last fall, volatility and market turmoil is and pretty much always has been a hallmark of equity markets and economies since the rise of capitalism.

Here are some other stats to help you put this current market into perspective:

  • 14 of the 20 biggest swings in market history happened before 1940.
  • Between 1935 and 2018, market swings have seen 1% daily swings and 2% monthly swings on average!
  • Yet, 25,290% is the amount of growth of the S&P 500 since 1935 to 2018.

So if you pay attention to the daily, weekly or monthly swings of any market, the volatility swings will be much more evident. If you zoom out to at least one year, but preferably three, five or 10 years, these volatility spikes will all but disappear.

Wealth Sense Advice

Ascribing to a long-view on investments and relying on the advice of a trained Investment Advisor helps you avoid these emotionally-charged decisions with a short-term biased view that will affect your investments for years to come.

Remember, for investors that stayed invested, during the Great Financial Crisis and most other downturns or volatile markets, reaped the rewards and saw exceptional returns over most others that try to time the market. Lastly, on average, risk still provides better rewards, as equities provided 6.7% annualized real asset returns from 1925-1940 while government bonds returned only 2.6% and cash a paltry 0.6%.

No matter where your rates of return are today, over the horizon real net returns are the more likely scenario. Feel free to talk to Steve McBride, Investment Advisor about your concerns in this market.

 

Disclaimers

This blog is solely the work of Steve McBride for the private information of his clients. Although this author is a registered Investment Advisor with Echelon Wealth Partners Inc. (“Echelon”) this is not an official publication of Echelon, and this author is not an Echelon research analyst. The views (including any recommendations) expressed in this newsletter are those of this author alone, and they have not been approved by, and are not necessarily those of, Echelon.

Echelon Wealth Partners Inc. is a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund.

Forward-looking statements are based on current expectations, estimates, forecasts and projections based on beliefs and assumptions made by authors. These statements involve risks and uncertainties and are not guarantees of future performance or results and no assurance can be given that these estimates and expectations will prove to have been correct, and actual outcomes and results may differ materially from what is expressed, implied or projected in such forward-looking statements.

The opinions expressed in this report are the opinions of this author and readers should not assume they reflect the opinions or recommendations of Echelon Wealth Partners Inc. or its affiliates. Assumptions, opinions and estimates constitute this author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results.

These estimates and expectations will prove to have been correct, and actual outcomes and results may differ materially from what is expressed, implied or projected in such forward-looking statements. Echelon Wealth Partners Inc., its divisions, subsidiaries, and affiliates, do not provide any income tax advice and does not supervise or review any income tax returns. Please consult your accountant.

Sources: 

https://markets.businessinsider.com/news/stocks/us-china-trade-war-slashes-global-gdp-600-billion-2019-5-1028234313

https://www.bloomberg.com/graphics/2019-us-china-trade-war-economic-fallout/

https://www.visualcapitalist.com/5-lessons-about-volatility-to-learn-from-the-history-of-markets/