Domestic stocks declined sharply in the first quarter. Large US companies, as measured by the Standard & Poor’s 500, fell 4.6%. Smaller domestic companies, reflected by the Russell 2000, dropped 9.8%. The Nasdaq Composite, heavily weighted in technology stocks, was off 10.4%. Foreign firms, generally speaking, were actually up for the quarter, as the Dow Jones World Index (ex US) advanced 3.8%.
At the time of this writing, investor sentiment has turned decidedly negative. Investor anxiety related to the implementation of the current administration’s trade policies has led to significant selling pressure. There is general agreement that the United States does need to address the status of our current trade relationships with many of our trading partners. However, many are startled by the aggressive use of tariffs, and the potential for retaliation leading to an all-out trade war. Indeed, China immediately slapped a retaliatory tariff of 34% on the US, and declared a number of American companies as “unreliable entities,” essentially barring them from doing business in China. Investor selling pressure led to a two-day decline in the S&P 500 of roughly 9%.
Those hoping for the Fed to come to the rescue were left unsatisfied, at least for now. Fed Chairman Powell observed that policy changes implemented by the White House contribute to “a highly uncertain outlook”, but the hard data remain largely positive and “show a solid economy. It is too soon to say what will be the appropriate path for monetary policy.” For those hoping for a Fed put, don’t hold your breath.
This widespread aggressive use of tariffs is uncharted territory, at least in modern times. Many had hoped tariffs would only be used as a negotiation tactic. But how effective is a negotiation tactic if the other party sees it as a bluff? Trump seems to believe they have to sell it hard up front, and make it believable. That includes some pain for all sides. Our hunch is this opening salvo will be followed by more tit-for-tat, then negotiations, and eventually agreements. The time frame is unknowable and will likely include Congress. Markets will rebound as progress is made.
So, for the long-term investor, what is our best advice at this point? Resist the temptation to make any major changes to your portfolio. If you have built a solid, diversified, carefully allocated portfolio, enduring the occasional market correction, while certainly uncomfortable, is part of long-term investing. One must carefully avoid mistakes when downdrafts occur, and perhaps even take advantage of buying quality companies at reduced prices. This is indeed part of the re-balancing process should this correction continue for some time.
In this exceptionally volatile environment, it is helpful to stay close to your trusted fiduciary advisor. As such, we welcome your calls, emails, texts, etc. And, as always, we adhere to our discipline of strategic asset allocation and style diversification; a strategy designed to mitigate overall portfolio volatility and enhance long-term returns.