Should Investors Fear A Trade War With China?
September 13, 2018

Should Investors Fear A Trade War With China?

In April, U.S. President Trump tossed a couple of punches at Chinese President, Xi Jinping. Trump’s left hook was an import tariff on steel. His uppercut was a tariff on aluminum. These tariffs are like taxes aimed at China. They’ll make it tougher for Chinese companies to sell goods to the United States.

But trade is a two-way street. China buys a lot of U.S. products. China’s economic success might even be great for U.S. stocks. If China punches back with its own import tariffs, it could hurt American businesses.

That’s why a trade war makes people nervous. They want these leaders to kiss and make up. Many new investors, especially, say they won’t invest until things settle down.

Unfortunately, it doesn’t pay to wait. Warren Buffett says, “You pay a really high price in the stock market for a cheery consensus.” History agrees. Time and again, people let current-event stories pull them by the hair. That’s why most investors earn poor returns.

Brian Portnoy describes this in his new book, The Geometry of Wealth: How to shape a life of money and meaning. He writes, “Our survival instincts compel us to run from perceived danger.” But when it comes to investing, he says this is silly. Portnoy references data by Dalbar. Between 1996 and 2015, a $100,000 investment in a U.S. stock index would have grown to $483,666. But the average investor in U.S. stocks would have turned $100,000 into just $250,573.

That means the typical investor earned just over half of what U.S. stocks dished out. Sure, it’s easy to blame investment fees. But investors’ fear and greed tossed the knockout punch. Speculation made the average investor buy high and sell low.

I don’t want to knock fears of a pending trade war. But we’ve had scarier times before. Few could compare to 2009. That wasn’t a pending crisis. It was an oxygen-depriving facecloth stuffed in global mouths. The year before, U.S. stocks fell 37.04 percent.

The picture grew darker in 2009. Washington Mutual declared bankruptcy. It was the largest bank failure in U.S. history. Lehman Brothers also went bankrupt. It was the largest corporate bankruptcy in American history. General Motors and Chrysler also cried for help. They joined a litany of Blue Chips in the bankruptcy ditch.

As a result, unemployment soared. CNN reported that U.S. unemployment hit 10.2 percent. Plenty of investors pulled money out of stocks. I still remember investors’ comments on my blog. People often wrote, “I’m waiting for stability before I invest.” But waiting cost them dearly. In 2009, U.S. stocks gained 28.70 percent. In 2010, they gained a further 17.09 percent. By 2014, U.S. stocks had recorded a five-year total gain of 135 percent.

The financial crisis was scary. But fear of nuclear war is a holy terror. The world closed in on Armageddon in 1983. I remember my elementary school teacher asking if we thought we would see a nuclear war in our lifetime. We said we would. In 1983, I’m sure plenty of people said, “I don’t want to invest until political fears calm.” Once again, they paid a hefty price.

In 1983, U.S. stocks gained 22.66 percent. In 1984, they gained another 2.19 percent. Five years after the war-fears peaked, U.S. stocks had gained a total of 93.44 percent. Most investors, unfortunately, didn’t reap such rewards. Economic forecasts stopped them cold.

Headlines also spooked investors when President Nixon faced impeachment in 1974. In 1989, investors feared the wave of revolutions in Eastern bloc countries. Investors feared stocks in 1991, when oil prices peaked during the first Gulf War. In 1997, they feared the Asian financial crisis. In 2006, they feared U.S. home foreclosures: a 42 percent increase from the previous year. In 2013, they feared the Arab Spring conflict. Multiple Middle East governments risked losing power. Oil prices averaged more than $105 a barrel. About 25 percent of North American companies said the Arab Spring revolutions were hurting them.

But, as the table below shows, it would have been better if investors weren’t aware of such news.

This brings us to the present. Trade wars flood the headlines. As always, plenty of people are afraid to invest. They want to wait for happier times. But if you have some money, invest it today. If you have an income, add money every month. Build a diversified portfolio of low-cost index funds. Be patient, and do yourself a favor: Ignore investment news.

It’s also worth remembering a long-running joke.

Economic headlines have predicted 1000 of the last 3 market crashes.

Don’t Let Scary Headlines Stop You From Investing

Year Why Investing Looked Frightening That Year’s Stock Market Return Following Year’s Stock Market Return Following Five-Year Total Return
2013 Arab Spring conflicts keep oil prices high. Global fears of Middle East governments’ toppling. Crude oil averages $105.87 a barrel; 25% of North American businesses report being negatively affected +33.35% +12.43% +104.83%
2009 Biggest economic crisis since the Great Depression; widespread corporate bankruptcies and unemployment +28.70% +17.09% +135%
2006 U.S. home foreclosures rise 42%, totaling more than 1.25 million foreclosures. The housing bubble bursts. Oil prices surge 16%. +15.51% +5.49% +15.62%
2003 Iraq war begins amid fears that Saddam Hussein has weapons of mass destruction; US unemployment hits highest level in 9 years (6.3%). +31.35% +12.52% +90.86%
1997 The U.S. exported more than $207 billion in goods to Asia in 1996. But in 1997, the Asian financial crisis begins, threatening U.S. exports, crashing Asian stock markets, Asian housing markets and Asian currencies; December 5th 1996, U.S. Federal Reserve Chairman says the prices of U.S. stocks are suffering irrational exuberance. +30.99% +23.26% +59.17%
1991 The U.S. leads the Gulf War in Iraq; oil prices surge mid-year. +32.39% +9.11% +116.61%
1989 Waves of revolutions sweep eastern bloc countries +28.12% -6.08% +92.29%
1983 The world fears a nuclear war between the U.S. and the USSR; U.S. mortgage interest rates were at 13.24%; +22.66% +2.19% +93.44%
1980 The level of the Dow Jones Industrials is at roughly at the same place it was 15 years previous; Soviets invade Afghanistan; President Carter signs Proclamation 4771, requiring 18- to 25-year-old males to register for a peace time military draft; U.S. inflation hits 13.5%; U.S. mortgage interest rates average 13.74% +33.15% -4.15% +92.76%
1974 President Nixon resigns before pending Watergate scandal impeachment; oil prices soar 300 percent as Middle East countries refused to trade oil with the United States (among other countries); U.S. inflation hits 11.04%; U.S. mortgage interest rates topped 9%. -27.81% +37.82% +31.87%

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This article contains the opinions of the author but not necessarily the opinions of AssetBuilder Inc. The opinion of the author is subject to change without notice. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.

Performance data shown represents past performance. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown.

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