The stock markets clearly did not agree with Donald Trump’s boast that his tariff wars would propel America into a new “golden age”.
Instead, they reacted as if the President had just delivered a recession proclamation, with indexes around the world slumping on Thursday and Friday after Mr. Trump proclaimed “Liberation Day” in a rambling speech to a hand-picked audience in the White House Rose Garden.
The size of U.S. tariffs on virtually all its trading partners caught almost everyone by surprise. The world knew it was coming but few people were expecting reciprocal tariffs as high as 34 per cent on China and 24 per cent on close ally Japan.
Canada got off relatively lightly this time around, but no one is assuming Mr. Trump is finished. He truly seems to believe this policy will result in a rebirth of American industry while at the same time enriching the U.S. Treasury. Any argument to the contrary is brushed aside.
That leaves investors scrambling to adjust their portfolios. Based on last week’s market behaviour, many of them did so by pushing the sell button. It’s a natural reaction when people are faced with massive uncertainty, as they are now.
One recent study suggests a knee-jerk sell response is a mistake. It was carried out by the Hartford Funds, and the results appeared in Wednesday’s edition of The Wall Street Journal.
The study looked at the performance of a US$10,000 investment in the S&P 500 over 30 years between 1995 and 2024, making various assumptions about investor behaviour. It found that if the money had been left intact, with no buying or selling, the value of the portfolio at the end would have been US$224,278. That meant holding through the tech bust of 2000-2002, the great financial crisis of 2007-2009, and the pandemic meltdown of 2020-2022.
However, if an investor sold and bought back later, missing the 10 best market days in the 30-year cycle, the end value would fall to US$102,750 – a drop in value of 54 per cent, all because of a missed 10 days.
If the investor missed the 20 best days, the end value would be US$60,306, a drop of 73 per cent. Missing the 30 best days would leave the investor with US$38,114 – down 83 per cent compared to remaining fully invested.
It’s an interesting analysis, if somewhat self-serving – mutual fund companies don’t like to see clients trading in and out of their positions. But there are other things to consider when making investment decisions in times such as this. Here are three questions to ask yourself.
What’s in my portfolio? The Hartford Funds study was based on the performance of the S&P 500. Very few people in Canada will have all their assets invested in that index. It may be that you are holding securities that should have been sold long ago, due to poor performance, lack of suitability, or some other reason. If adjustments are needed in your portfolio, wait for a rebound (it always happens during a market slide) and make them.
How strong is my risk tolerance? No one can predict how long Mr. Trump’s trade war will last. Based on the strength of his personal conviction, I’d guess at least six months. It may take that long for the inflationary effect of the tariffs fully work their way through to consumers and translate into political pressure on the President. He won’t cave willingly so the coming months are going to be unpleasant as the global economy tries to adjust to the havoc he has unleashed. If you can’t cope with that (the old “sleep at night” syndrome), perhaps you need to lighten up on high-risk equities. But if you decide to sell, do so judiciously and ascertain the tax implications before you act.
How long is my time horizon? A “stay invested” approach is fine if you have a long time horizon. It’s not a great strategy for people who need to access some of their capital in the short term – for example, first time home buyers and seniors who depend on their investments for some or all of their income. Investors in this category should be holding a disproportionate amount in cash or cash equivalents at this time.
What should I buy? There has been a lot of talk of stagflation recently – renewed inflation combined with zero or negative GDP growth. It’s a credible scenario and one way to profit from it is to invest in real return bonds that are indexed to inflation. I have written several times about the iShares 0-5 Years TIPS Bond Index ETF (XSTP-T), which invests in short-term, inflation protected U.S. Treasury notes. It’s up a remarkable 13.64 per cent in the past year (to March 31).
Also worth considering is the iShares Canadian Real Return Bond Index ETF (XRB-T). Here are the details.
Security: This fund invests in a portfolio of Canadian federal and provincial real return bonds, where both principal and interest are indexed to inflation.
Key metrics: The fund was launched in December 2005 and has assets under management of $263 million. The management expense ratio is 0.39 per cent.
Performance: Generally poor. The average annual compound rate of return since inception is only 2.97 per cent. But we have not experienced a period of stagflation since the fund was launched. Over the 12 months to the end of March, the fund gained 8.83 per cent.
Portfolio: BlackRock’s website shows an 88 per cent holding in federal government bonds. Provincial issues are from Ontario, Quebec, and Manitoba.
Risk: The company says the fund risk is low-medium. I’d rate it as medium-high. It can be subject to big swings when conditions are negative for bonds, such as the loss of 14.58 per cent in 2022.
Distributions: Payments are made semi-annually and can vary considerably. The total payout in 2024 was 56 cents per unit.
Summation: I see this as a short-term holding in anticipation of tariff-driven stagflation. The position should be sold if President Trump calls off the trade war – a welcome but unlikely development, at least in the short term.
Action now: Buy. The units closed Friday at $23.79.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.
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