Investing in the age of trade wars
Financial markets showed signs of stabilizing on Tuesday, a day after China’s announcement of retaliatory tariffs on 5,140 imports from the United States touched off Wall Street’s worst day since January 3. Are things back to normal, or is a global economic slowdown just around the corner?
Nobody really knows what’s going to happen, but there are some encouraging signs for investors.
First, it’s true that a collapse of U.S.-China trade discussions could hurt the earnings outlook for stocks. Investors expect that Chinese tariffs might lift corporate costs and lower profit margins, while continued uncertainty surrounding a trade deal will hinder the ability of companies to plan or make capital expenditures. But investors should also remember that despite the seemingly outsized presence of China in the U.S. economy, sales of American goods there are relatively small, just $130 billion of U.S. exports out of a $19 trillion economy.
U.S. economic growth remains strong, and corporate earnings — the main driver of stock performance — are still resilient. Net income for the S&P 500 rose 0.6% in the first quarter, according to Bloomberg Intelligence, despite predictions from many that it would fall from a year ago.
What’s more, the S&P 500 returned to record highs in recent weeks and as of this writing is still up more than 13% since Dec. 31.
Next, not all stocks react the same to bad news. With this recent trade war escalation, the hardest hit stocks have been those of companies that rely heavily on global trade. Big-name companies with strong exposure to China such as Apple, Amazon, and Caterpillar sold off on tariff news yesterday. At the same time, the S&P 500 utilities index rose 1.1% during yesterday’s selloff, and the real estate index was flat.
It helps to own different kinds of stocks because they perform differently depending on the market environment. It’s called diversification.
Yes, some of the volatility over recent weeks has been jarring. From Fed policy to trade talks with China, the daily news flow has created significant ups and downs for investor portfolios.
But if you’re feeling anxious about market volatility stemming from U.S.-China trade policy, it may be that your investment strategy isn’t aligned with your risk appetite.
“Risk appetite” refers to the amount of investment risk you’re comfortable taking for a particular investment goal. It’s usually based on the timeframe for that goal and on your personality and personal preferences. Goal-based investing is an important part of the client experience at Azzad.
Risk appetite generally tends to be higher for investors who have a long time horizon to reach their investment goal (think retirement), and lower for investors who hope to reach their goal sooner (think college education for a teenager).
Personality and personal comfort play a big role in risk appetite, as well. If you’re investing for a long-term goal but trade war news is still keeping you up at night, you may be investing outside of your risk comfort zone. There’s no “right” level of risk tolerance, just one that’s right for you.
Curious what your risk appetite is? You can take this short quiz to learn your “risk number.”
If your investments have a higher risk level than you’re comfortable with, you should talk to your financial advisor about adjusting your allocation. (You can reach your Azzad advisor by calling 888.86.AZZAD).
If you have a high risk tolerance and a long enough timeframe, a market drop is either something to ignore or an opportunity to buy or rebalance your current portfolio. In a market dip, rebalancing would mean selling more conservative investments that haven’t dropped with the market and buying more aggressive options while prices are lower.
Whatever may be happening in the market, understanding your personal risk appetite and sticking with a long-term plan that aligns with it are crucial to your success as an investor. Keep that in mind the next time you read an attention-grabbing headline about trade wars.