After the tax reform was enacted in late December, the current administration has now placed its focus on global trade agreements. The motive? Trade agreements that are perceived to be unfair and unbalanced. The goal? Use the massive weight of the U.S. economy to renegotiate those agreements to benefit U.S.-based businesses and workers. A major and specific focus has been steel, aluminum, and of course, China.
You may have heard the term “tariffs” being tossed around recently in the news. Tariffs are taxes or “duties” that are applied to specific imports and exports. History has shown us that when tariffs are applied, or even suggested, it is not good for the market most of the time.
The global trade wars that followed the harsh tariffs imposed by the Hoover Administration in the early 1930’s deepened the Great Depression. Worldwide economic hardship led to political restructuring and eventually to World War II. Back in March of 2002, President George W. Bush imposed steel tariffs between 8% and 30% scheduled to remain in effect until 2005. Canada and Mexico were exempt. Like President Trump’s recent steel and aluminum tariffs, the European Union threatened retaliatory measures and went to the World Trade Organization (WTO). The WTO ruled against the U.S. and two years after they were proposed, Bush dropped the tariffs. Both the Dollar and Equities (stock) took a hit in that time.
The current administration’s plans for specific countries and tariffs has yet to include details. We do wonder if the bite will be nearly as bad as the bark has been with regards to tariffs. President Trump has been known to negotiate in public and so far, the media coverage of a possible “trade war” has brought awareness to the trade deficit. As a result, negotiations have begun both domestically and internationally with China, Mexico, Canada and the EU to negotiate fair deals for both sides. Unlike the times of Herbert Hoover, the world is much more globally intertwined. Most economists believe that all sides would be forced to play nice and allow cooler heads to prevail as aggressive responses or decisions could hurt the markets and especially the value of their respective currencies.
So, how does this affect you and what can you do to protect yourself and your investments?
First, there are always specific issues in the news cycle that impact markets. On a day to day basis, the news cycle drives investor sentiment which in turn impacts markets. Because we invest for the long term, we are not concerned about the day to day movements of markets or investor sentiment. When “fear” drives people to sell out of the market or when greed drives them in, we stay the course. Emotional driven behaviors in the market are typically short lived so don’t be reactive; instead be disciplined.
The second is to analyze and be mindful of positions that may be directly related to impacts of relationary measures like currency and international positions.
Lastly, diversification is and will forever be your friend when it comes to investing. These times are a prime example of unpredictability in most areas of the market. Those invested over the last two decades have witnessed burst of two major bubbles (tech and housing), several wars, a global recession, and record low interest rates. All this has led many to wonder- “Where is the right place for my money?” Proper diversification means you are not over exposed to any one sector or category including the troubled areas mentioned above.
The discussion that is happening around trade will be an interesting one to watch. No one knows how it will be settled but what we do know is these specific issues have happened in the past. Do not allow fear to drive you into being undisciplined. At FSG we have a saying, “Discipline is the most significant attribute of a successful investor.” To become disciplined, you must have knowledge which in turn will create confidence. That confidence will allow you to become disciplined.
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This article is written by Ronald Thompson II.