Personal Finance - Trump, tariffs and stock market losses

Whether you like him or hate him, Donald J Trump is going to be with us for the next four years as President of the United States of America.

The initial bump markets received at the beginning of his second term have now turned into what some are referring to as a slump because most market indices are now in negative territory since his taking of office.

And as I write this, the market sell-off has wiped out about €5 trillion from the S&P 500’s peak in February.

And jaws dropped in investment firms when he first began talking about tariffs.

They were on, then off, then on again and then reduced and then they only applied to certain sectors, and all of this uncertainty is creating huge confusion and fear for businesses and for investors and what markets really dislike is uncertainty.

In fact they hate it.

Not knowing whether there is going to be a global trade war or not and whether inflation would increase if there was (almost certainly it would) is an example of the unknowns that markets don’t respond well to. And it’s not knowing what Trump will do from one day to the next is creating all this uncertainty and the subsequent volatility we’re seeing in markets right now.

And Trump's actions have filtered down to us because if anyone has looked at their investment or pension funds in the past 10 days, they won’t like what they’re seeing because they’ll see values that are quite a bit lower than what they were just 20 days ago.

People have been used to seeing their fund values going up, particularly over the past two years where markets have seen great gains, and now that’s stopped and it’s going the other way, and when that happens people understandably get worried.

They begin to think about whether they should be doing something like moving their fund into cash until all of this madness stops.

One person contacted me and was telling me how his pension fund has fallen in value by 6%. Back in November it was €325,000 and now it’s €305,000. And that €20,000 drop is a chunk of money, and he wanted to know how much further it could drop.

And that’s something nobody knows or has any control over.

But what we have control over is how we act during times like this.

I think the term used is controlling the controllables.

The problem with not knowing what’s coming next is that we have this urge to rid ourselves of the anxiety we’re feeling no matter how destructive our actions could be. And what happens during times of volatility is that some people get out of the market because things are uncertain, so they move their money into cash which is certain. But what they’ve just done is made good on their loss which up until then was just a paper one.

And it’s easy to say you shouldn’t do anything particularly when you’re looking at your fund fall in value each day and you’re reading and listening to headlines that read, market plunges or stock rout picks up steam or market bloodbath, but then a day later you’re seeing headlines saying, markets rebound.

Which all plays with our emotions, because on Monday we’re worried because we see bad news, and then on Tuesday we feel better because markets have improved but that happy feeling doesn’t last long because we’re waiting to see what happens on Wednesday.

My advice when things like this happen is never give in to the pressure you’re feeling and act on one day’s declines or one month’s declines. Maybe stop looking at how your fund is doing every other day as well and just check in once a month or quarter and maybe stop listening to the noise coming from media outlets which is likely to be more doom and gloom rather than messaging, which is considered and factual.

Which reminds me of an email a client sent to me recently who said, ‘I can remember my last panic during Covid-19 when the drop was even bigger, but it all recovered and has been exceptional since then.’

And if we didn’t have a chat back then he would have crystallised his paper loss and made it real, but he didn’t, he held firm and his fund recovered and he went on to have significant gains all because he trusted how his fund was set up and he knew it had the right mix and percentage of asset classes specifically for him.

But we’re only human and all of this turmoil can make us do things we might later regret because we pushed the panic button instead of the patience one. And looking back, we might regret not holding our nerve because if we did, rather than losing money, like the individual I was just telling you about, we would have ended up earning much more.

That’s easier said than done and hindsight is 20/20, right?

But being comfortable with short-term loss and volatility is important and something you just have to get used to because it ensures long-term success. And once you have a well-diversified portfolio and it's one that you are happy with and it continues to be aligned with your personal risk profile, I think staying committed to it particularly when markets are volatile is essential.
And you don’t want to do nothing either, of course you want to protect your money and avoid preventable mistakes but making those sometimes emotional and rational decisions can be your downfall. You think you’re doing the right thing when sometimes it’s just not.

Just remember and know that markets can be unstable in the short term but over the long term they have proven to be very consistent. And periods of volatility are an inherent part of investing and know that fluctuations are actually very normal.
And here’s some more interesting data, the average intra-year decline for the S&P 500 Index over the past 40 years has been 14%, which means stocks drop on average in the S&P by that amount every year but that doesn’t mean they end up negative at the end of the year. In fact despite these annual reductions the S&P finished the year higher in 31 of the last 40 years.
Let’s look at just last year.

For 20 days between July 16 and August 5, there was a 9.7% decline in the value of the S&P and that was down to fears about a recession and the Nikkei crash in Japan. And for 22 more days between the 28th of March and April 19th, there was a 5.9% decline because of high inflation, the Federal Reserve not reducing interest rates and tensions between Iran and Israel.
But despite these declines the index over a calendar year finished 25% higher.

So, the market is reducing and increasing all the time, you just don’t know or hear about it. The S&P 500 for 20 days last year fell more in value than what markets have fallen by in the past couple of weeks, but they still ended the year higher.
And we also know that despite these ups and downs markets will still produce positive returns about 75% of the time so about three times every four years, which means a negative year earns you the other three.

So, before you do anything I would say, seek out advice and get opinions from people like your financial adviser rather than your work colleague or a friend or relative or what a news outlet are saying.

They might be able to give you insights like the ones a very large investment and pension company gave me last week.
I reached out to them to see what their trading room was thinking, and here’s what they told me.

They said they have added equites to their various portfolios so rather than run to cash and bonds they’ve actually increased their equity positions and are now equity positive. And they are doing this because and I quote ‘we would likely buy into dips and this move is motivated by the size of recent corrections in certain markets, the depressed level of short-term sentiment and the room for markets to recover their poise and focus on factors other than tariffs and tweets.’

And in relation to tariffs there’s lots of noise i.e. they’re on, then off, then on again and what’s going to happen is unknown, but the rest of the world has indicated that they will retaliate against the US but hears the interesting thing, they said the market is pricing more towards noise than all-out trade war.

Their final piece of feedback which was, ‘so far, the market has adopted a sanguine approach, but we remain vigilant.’
And I had to look up what the definition of sanguine was and it’s, being optimistic or positive, especially in an apparently bad or difficult situation.

Let me finish by staying optimistic and reminding ourselves that during Trump's last presidency the Dow Jones returned a figure of 56% which was an annualised gain of 11.8% and you’d have to go back to Calvin Coolidge in the 20’s to get a better return from a Republican president.

And this return was just slightly lower than what Barack Obama delivered during his time in office which was a +12.1% annualised return. And by the way under Obama’s first term in office, the S&P 500 was -15.4% in the first 50 days of his term whereas Trumps first 50 days of his second term it was-6.4%.

That’s not to say that Trump will match his 11.80% annual gain this time round, and he only said last week, ‘I’m not even looking at the market’ but you can be sure that he and his party absolutely are and he’s going to have to re-think his strategy that it's okay to let markets fall while he’s experimenting with tariffs because if he doesn’t and markets perform poorly, the Republican party is sure to lose voters come the mid-term elections.

I’ll sign off by saying six things to you (1) a selloff doesn’t mean a market crash (2) don’t overreact, stay calm, vigilant and focused and (3) we can’t expect things to go up all of the time (4) investing in equities is never a straight line and (5) seek out advice if you’re unsure and (6) be patient because there is a saying that the market transfers wealth from the impatient to the patient.

Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted at liam@harmonics.ie or www.harmonics.ie