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The Perspective - April 2018

Don’t Panic!

You’ve probably heard us say that panic is not an investing strategy, but the media often takes the opposite view, as they urgently rush to report “breaking news” and add “markets in turmoil” specials after particularly volatile days. It must work to gain viewers, or they wouldn’t do it, but we typically suggest that investors would be better served by taking a step back, keeping emotions in check and maintaining discipline. Turn off your TV!

One day recently we saw a 700 point swing in the Dow Jones Industrial Average from a big loss to a solid gain. If you’ve been tuned in to financial news, you’ve probably noticed how the media has a tendency to want to find the “one” force each day for every move or swing in stocks, but as we all know, the market has always been more complicated than that.

We anticipated market volatility would escalate this year—consistent with late-cycle economic and market tendencies—and while we are positioned defensively, we believe that opportunity comes with volatility. Aside from the tendency for volatility to pick up when the economy moves into its later stages of the cycle, there are also shorter-term forces at work as well.

Trade Tensions

Trade has been a major topic of recent discussion, but despite the dire headlines of a potential trade war, at this point it seems more like negotiations are aimed at getting better and fairer trade deals in place. As we know, things can change in the matter of a tweet, so this by no means guarantees that a deal is assured, but it is more reassuring than some of the headlines would have indicated only a couple of months ago.

China has been the hottest headline lately, with the United States proposing tariffs on roughly $50 billion worth of Chinese imports. Consequently, China came back immediately with proposed tariffs on roughly $50 billion of U.S. imports, followed by the President announcing he’s looking into the possibility of tariffs on an additional $100 billion of Chinese imports.

While this may sound like the beginning of a trade war, we should place emphasis on one important word…proposed. These are proposals and negotiating tools. Furthermore, the tariffs of both sides wouldn’t go into effect for at least several weeks—with both sides making sure to note that they continue to negotiate with the hopes of coming to a deal. Although we don’t want to downplay the consequences of a possible trade war, as we’ve previously mentioned total exports to China represent only 0.7% of U.S. gross domestic product (GDP) (Cornerstone Macro Research).

Trade War to Actual War?

Market worries broadened this past week from fears of a trade war to an actual war, or at least a military strike. Markets had an initial negative reaction when President Trump warned Russia to “get ready” for a U.S. missile strike on Syria over a suspected chemical weapons attack. Although airstrikes take place almost daily as part of ongoing campaigns, focused initial missile strikes and military operations can have impact on markets. Fortunately, there is a long history of U.S. missile strikes in the past 25 years we can use to assess the potential market impact. In short, history shows us that the impacts of these geopolitical conflicts have been small and brief.

Looking back from the 1993 Iraqi strikes to the 2016 strike in Yemen, the stock market reaction was most often slightly negative on the first day of missile strikes, but recovered losses within five days in most instances. Following the two prior U.S. strikes on Syria (2014 and 2017), stocks were still down five days later, but those declines began before the strikes and appeared driven by economic data.

We believe the pending U.S. missile strike on Syria may be similar to those we’ve mentioned above.

In Conclusion

With all the action surrounding trade issues, missile attacks, and headlines coming from the tech sector; economic developments and earnings numbers have moved to the back burner. With earnings season upon us, it is more important than ever to block out daily news and focus on fundamentals. This is one of the main reasons we have an established, proprietary investment process. It allows our investment committee to tune out the noise and make sound decisions.

Our best advice for all our clients is to keep things in perspective and remember that geopolitical risks are a regular part of investing. It’s also important to remember that we have a long history of geopolitical developments that show us how holding a well-diversified portfolio can buffer the short-term market moves that result from harrowing headlines.

As always, we are humbled by your trust and confidence. Please do not hesitate to let us know should you have any questions or concerns.


David B. Miller


Mallen M. Urso