It’s no secret that financial markets have been dealing with increased volatility lately. But what does this mean for you?
It would seem that with each passing day comes an escalation in the trade dispute between the US and China – any threat of US tariffs on Chinese goods is immediately followed by a counter threat by the Chinese government. As a result, we see a rise in the US dollar and a decline in the Chinese yuan. Capital is also retreating, leaving China to find refuge in more cautious assets like US Treasuries.
What are the implications of such events? For starters, goods from China are proving increasingly expensive for US consumers. In China, rising import prices will adversely affect living conditions and pressure import costs, ultimately hurting corporate profit margins and government spending. These shadows on the boarding point to ever more complex challenges for the American and Chinese economies. And, should the world’s two largest economies slow down, the global economy is likely to follow suit. This, coupled with an inverted yield curve, increases the likelihood of a recession.
And all this uncertainty is not lost on investors. When global economic trends negatively impact corporate earnings, investors typically seek to withdraw their money from the shares of those companies. This eventuality brings down stock prices, which we are witnessing now, as the summer period of 2019 draws to a close.
Should you sell?
Stock markets tend to experience periods of volatility, especially after prolonged and vigorous bullish periods such as the one we have just experienced over almost ten years. While no one wants to see their holdings diminish, it is essential to remember that selling during market volatility has never been the right course for investors. Historically, investors have resisted the temptation to sell and held on through the ups and downs that have achieved good long-term returns. In contrast, those who panicked and sold their holdings during dips often find themselves in a hostile territory over the long term.
We encourage investors who are uncomfortable with short-term losses due to market volatility to contact their financial advisor to review their asset allocation and ensure that their portfolio holdings align well with their financial goals. Term and their level of risk tolerance. A simple rebalancing of the portfolio, such as devoting a slightly higher percentage to fixed-income-focused investments, can help reduce volatility and ease the fears of more risk-tolerant investors.
