Holding Tight in the Volatility
March 2, 2018
The market got hammered yesterday. I think a lot of it had to do with the noise from higher yields – which have come down precipitously – to an aggressive Fed. And now we have this 1930s style global trade war overshadowing an American economic revival that many thought was a relic of the past.
Listen, folks. The Trump administration isn’t talking about reenacting the Smoot-Hawley Tariff Act and hitting 20,000 items with import tariffs. It’s about cheap steel that comes into America nefariously and has roiled our manufacturing base. The goal is to curb Chinese dumping by applying a 25% tariff on steel and 10% on aluminum, both of which could be implemented as early as next week.
However, tariffs, which are essentially an import tax, may make the price of doing business in the U.S. higher and also impede growth. While this may be good for the steel and aluminum businesses, tariffs might not be the best way to help workers.
No one wants a full-scale trade war, especially China with their debt having climbed from $6 trillion in 2007 to $29 trillion today – that’s 260% of the Gross Domestic Product (GDP) last year. The good news is I don’t expect any potential tariff to have a real impact on the economy, and I also don’t believe we’ll see a trade war.
But now that the Wall Street Journal has declared potentially targeted tariffs a mistake on par with the Bay of Pigs, I’m feeling more confident this might be the right move. I don’t think Canada should be covered. However, it’s time to send a message instead of bellyaching about how unfair and mean China is while accepting unfair actions that hurt our economy.
I had suspected there was a chance of the indices re-testing their recent lows, and when key support on the Dow at 25,000 failed to hold late on Wednesday that become more of a possibility. Whether we do or don’t, what’s important to keep in mind is that these emotional gyrations belie the fundamental value proposition to own shares of great American companies. And I am confident there is a lot of money to be made when the market rebounds.
The current volatility isn’t a reflection of underlying fundamentals or upside potential. There have been few disappointments with recent economic data – figures out just yesterday sent the Atlanta Fed’s GDP estimate surging from 2.6% to 3.5% – and earnings continue to be phenomenal. Therefore, the smartest move is to hold tight.
It’s time to adjust to the fact that last year’s idyllic days of zero volatility are over. However, the bull market is here to stay. I’m licking my chops and am ready to make the kind of purchases that allow investors to outperform the indices, but I also understand there are losers in the market that have nothing to do with this temper tantrum. Our strategy will be to move on from those with broken fundamentals while also taking profits in certain high-beta names in order to raise money and mitigate anxiety. Then, we can put our cash back to work.