Surviving a trade war
Smart choices can protect your 401(k).
Are you nervous about the Dow’s wild swings, brought on by trade war tweets from President Trump or announcements from China saying that a trade deal with the U.S. is on or off the table?
Get used to it. Market volatility driven by trade and tariffs isn’t likely to fade anytime soon despite the two economic superpowers agreeing Friday to a “Phase 1” deal. The U.S. agreed to roll back some tariffs on Chinese imports and cancel a new round of levies that was set to hit Dec. 15. In return, China agreed to boost its purchases of U.S. agricultural products.
“Pandora has opened the box. Trade strife is here to stay,” says Jeff Mortimer, director of investment strategy at BNY Mellon Wealth Management. “There’s not going to be a single document, (or) signing of a ‘Phase 1’ deal, that makes it go away.”
The “Phase 2” and “Phase 3” deals between the world’s two biggest economies might be even tougher to hash out, as remaining issues such as theft of U.S. intellectual property and Chinese currency manipulation, are complicated.
“Any optimism will dissipate pretty fast after a Phase 1 deal,” says Christopher Smart, chief global strategist at Barings Investment Institute.
That means 401(k) investors can expect periodic market drops on negative trade news, including the Dow’s 724-point plunge on March 22, 2018, when Trump first proposed hitting China with $60 billion in tariffs.
Still, stock performance won’t be all bad. Expect tripledigit gains when positive headlines boost optimism on trade and growth.
Remember, U.S. stocks have climbed 26% to record highs in 2019 despite trade uncertainty, Smart notes. The economy grew by about 2% in the third quarter. Corporate earnings growth, while less robust than 2018, has remained positive this year.
Still, investors face risks and opportunities related to trade.
Investment portfolios could face challenges from other trade spats, such as Trump’s recent threat to reimpose tariffs on imports of steel and aluminum from Brazil and Argentina, and his proposal to slap duties on $2.4 billion of French products, including cheese and champagne, in retaliation for
Paris levying a 3% tax on U.S. tech firm sales in France.
So, what’s a 401(k) investor to do? Should you put up a wall around your stock holdings to dodge any future, trade-driven sell-offs? Or climb out of your bunker and bet the trade dispute won’t deteriorate or, perhaps, even be resolved in a bullish way?
For now, since both countries are set to sign off on a “skinny deal,” removing one big risk facing the market, stock investors should look for ways to “play offense,” says Phil Orlando, chief equity strategist at Federated Investors.
While the Phase 1 deal doesn’t remove all the uncertainty facing investors and corporate CEOs, it does signal progress. It also should reduce recession fears and limit the hit to earnings of U.S. companies that would be hurt most by an escalation of the trade war. The thaw in relations between China and the U.S. should help keep the stock market’s current upward trajectory on track, and boost investors’ willingness to be more aggressive with their stock investments as the global growth outlook improves.
Deal is sealed! How to profit
The trend of the stock market and other risky assets, such as oil, getting a lift when there’s “good news” on the trade front should continue.
The stocks that will rally the most, Mortimer predicts, are ones most “tethered to economic growth.”
They include shares of industrial companies, such as heavy-equipment makers, or oil and natural gas companies that fuel growth. Or “cyclical” stocks, such as automakers and aerospace companies, that move up and down in tandem with the economy. “They would do best,” he says.
U.S. agriculture, such as soybean farmers, also could see their asset values rise, says Federated’s Orlando. Another offensive play: Invest in emerging markets, as these economies are more exposed to China. And what’s good for China and the global economy, is good for developing markets.
Stocks with large sales exposure to China, such as semiconductor makers, should enjoy a relief rally, adds James Lucier, managing director at Capital Alpha.
But how long the relief rally lasts depends on how well the future trade negotiations between China and the U.S. play out. The Phase 2 and Phase 3 parts of the China/U.S. deal out could drag out well into next year or even longer, Wall Street pros say. And that leaves a lot of time for talks to sour and investor sentiment to turn downbeat again.
Ways to insulate your portfolio
“How do you protect yourself ?” asks Federated Investors’ Orlando. “Raise cash and de-risk the stock portion of your portfolio.”
Take profits on high-flying stock winners and move the money into less-risky investments such as dividend-paying stocks that include utilities, telecom companies and real estate investment trusts (REITS).
Another way to avoid harm from global trade headwinds is to tilt your holdings toward domestically-focused U.S. stock, adds James Lucier, managing director at Capital Alpha.
Mortimer sums up the the trade-tiff-relapse portfolio : “If the global economy slows, you’d want a portfolio that screams safety,” he says. “You want bonds and fixed income.”