The term rollercoaster is coming up more and more in media reporting about the ride investors have been on recently. That ride was all about ascending from the moment it was announced Donald Trump would be the next president of the United States back on November 8, 2016. His initial positive impact on the markets has been dubbed the “Trump bump” but that seems to have ended, or at least stalled, according to the latest headlines. Wild market swings have wiped out significant gains and led to speculation we’re entering correction territory. As an investor, it’s tough to know what’s happening, why and what to do next.
Let’s take a moment and dig behind the headlines. The main reason the markets climbed when President Trump was elected is because of his campaign promise to cut corporate tax rates to 20% from 35%. In the end, he was able to get it down to 21%--in my opinion a huge boost to corporate America’s bottom line--which the markets liked.
In the last few weeks, however, the markets have pulled back, at times down 10% from recent highs. Some individual stocks have dropped more than 20% from their highs but I don’t think this will morph into anything larger because the fundamentals remain strong and the U.S., Canadian and global economies are all growing.
I think the reason we’re seeing the market pull back now is due to political and geopolitical tensions. The President’s tweets about a trade war with China and China’s pushback, his talk of renegotiating NAFTA, which could hurt all parties, and on any given day the world must contend with the possibility of the U.S. taking military action against North Korea, Russia and Syria. Then there is the political theatre coming out of the White House with all of the hirings, firings and resignations. All of this uncertainty is being reflected in the markets. At the same time, the days of record low interest rates appear to be over as the Federal Reserve looks to continue raising rates this year and into 2019, which will impact lending and borrowing.
With all of this noise, it’s difficult not to get caught up in the politics of the day but that’s exactly what investors have to avoid. It’s important to separate the headlines from the underlying fundamentals of the investments and continue to look for good quality investments that align with your risk level, investment goals and time horizon. Don’t change your investment approach because of President Trump’s tweets because as we’ve seen, one tweet is almost immediately followed by another that dials back or reverses the first. The markets drop and then go back up accordingly.
Three key pieces of advice for dealing with market volatility:
- Stay disciplined. The first question you have to ask yourself is do you need to be in the market? If the answer is yes, then stay invested because right now the fundamentals underlying the U.S. economy and the Canadian economy are strong and first quarter corporate earnings are expected to increase by double digits.
- Diversify. It’s the cheapest way to protect your assets.
- Constantly evaluate your portfolio. The buy and hold strategy made famous by Warren Buffett no longer works. When your investment reaches the target you’ve set, take the profits and rotate them into something that is currently cheap--there are many deals to be had today as many strong companies are undervalued--or into a more conservative investment, such as a bond, depending on your investment objectives.
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