The Stock Market Has Been Tanking as a Result of Trump’s Policy Initiatives. Is it Different This Time?
By John H. Robinson, Financial Planner (March 15, 2024)
The past couple of weeks have seen the U.S. stock market (as measured by the S&P 500 Index and Nasdaq Composite Indices) decline more than 10% from the February all-time highs. I wrote about this potential eventuality, in my February 16th blog post, How to Invest in the Trump Era, and I stand by the advice in that article. However, since the hypothetical is starting to “get real,” the purpose of this follow-up post is to address the most common questions and concerns.
Same as it Ever Was
The most common question I have fielded over the past two weeks is, “With everything that Trump has been doing, don’t you think it is different this time?” The short answer is, yes, of course the cause of the recent stock market volatility is different…just as the cause has been different every other time the stock market has declined relatively sharply. The 35% Covid-induced market decline was unique. So too were the 50%+ declines caused by the 2000-2002 dot com bubble bursting paired with 9/11 and the 2007-2009 subprime mortgage crisis that almost led to a global banking collapse. The causes of noteworthy market declines are always unique, and, to be clear, the current market decline is not yet noteworthy. However, all previous declines have ended the same way – with a rebound and a recovery. There are fundamental reasons why the current decline is likely to have the same positive outcome.
Warren’s Words of Wisdom
In his 2022 Berkshire Hathaway shareholder letter, Warren Buffett wrote that in his 80 years of investing, he had “yet to see a time when it made sense to make a long-term bet against America.” Keep in mind this statement was made after the first Trump presidency. What Mr. Buffett meant by this is that America has a uniquely favorable blend of democracy and capitalism. When democratically elected officials make poor policy decisions the stock market serves as a weighing machine in expressing its collective displeasure. Failure to take corrective actions will likely result in the party responsible for the poor decisions to be voted out of office.
Mr. Buffett also famously said, “I try to invest in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will.” I believe the wit and wisdom of this statement also apply to our political structure. While I do not include political commentary in my prose and I am not suggesting that President Trump is an idiot, it is a fact that many of the policy decisions he has made since taking office are, at best, untested. It is also a fact that, in America, policy decisions that produce poor economic outcomes are often punished at the polls. If the President’s decision-making paired with a complicit Congress continue to produce near-term pain for consumers and investors, the mid-term elections may produce a corrective changing of the guard.
Do You Think the Stock Market Will Continue to Fall? Should We Sell?
The time to plan for severe, prolonged stock (and bond) market declines is BEFORE they happen, and I would like to think that the people for whom I work have already done that. In my opinion, best way to prepare for future exogenous negative market environments is to have 5-7 years’ worth of expected portfolio distributions banked in assets that do not decline in value. If you are retired or are within 5 years of retirement and have not done that yet, then perhaps you should sell some of your equities to create this reserve. It is best not to sell when the market is depressed, but, at this time, the U.S. stock market is still not too terribly far off its all-time high.
Alternatively, if you are a decade or more away from retirement and are continuing to save for that objective, I encourage you to view this and similar future downturns as opportunities to invest in stocks at a discount.
Where to Invest if Our Political Leaders Cause Irreparable Damage to Our Economy, the Global Standing of the U.S., and/or the Stock Market?
The two most commonly cited catastrophic fears are hyper-inflation caused by tariffs and/or loss of trust in the U.S. dollar caused by the continued upward spiraling of our national debt. As I have conveyed in other communications, gold has historically been regarded as an effective hedge against inflation and potential calamity. Bitcoin is a more controversial asset that may also merit consideration. Its ability to serve as an inflation hedge is unproven. Throughout its brief history, Bitcoins price has tended to fluctuate up and down with the stock market to but with greater volatility, and that has been the case over the past few weeks as well. There may be, however, a case for Bitcoin becoming a store of value under more extreme investment environments. [See Is Bitcoin a Legitimate Asset?]
In terms of assets to avoid, I encourage any investors who are fearful of inflation to stay away from bond mutual funds and to avoid locking in maturities on CDs and bonds for longer than a year or two.
Stay the Course? Ride it Out? NO!
In communicating with clients over the past week, a few of you have interpreted my comments as “stay the course.” That suggests that I am dismissive of the current investment environment. I hope I am never dismissive.
My guidance is consistent over the years insofar as I want our clients to avoid marking market-timing decisions. However, this article and my other published commentary provide very specific actional actionable portfolio management guidance that may vary from one investor to the next depending upon life-stage and financial position.
In terms of what to expect from the current downturn, investors in stocks and stock mutual funds/ETFs should understand that declines of 20%-30% are not rare. Sometimes the stock market goes down. It goes with the turf. However, as unpleasant as that may be for some investors, it is important to keep in mind that you are investing in real companies with real earnings. A major reason why the stock market has recovered from 100% of all prior declines is that as these companies remain profitable, they become worth more over time.
John “J.R.” Robinson is the owner/founder of Financial Planning Hawaii and Fee-Only Planning Hawaii and is a co-founder of personal finance software maker Nest Egg Guru.
