Stocks dropped again on Friday after President Donald Trump instructed the U.S. Trade Representative to find an additional $100 billion of Chinese goods on which to place 25% tariffs, another step in a weeks-long dispute over trade. The announcement was viewed as raising the potential for a trade war.
Separately, the March labor report from the Bureau of Labor Statistics showed weaker-than-expected payroll growth, an unchanged unemployment rate and slightly higher wage growth; however, it did not appear to be a driver of Friday’s market weakness.
Schwab’s Chief Global Investment Strategist Jeffrey Kleintop says the war of words may amount to little more than that. “Though trade wars were once common, we haven’t seen one in 90 years for lots of good reasons that remain in place today,” Jeffrey says.
Recent action underscores the importance of international diversification, Jeffrey says. “So far in 2018—and especially since March 1 when Trump announced the steel and aluminum tariffs—as the trade worries have taken root, stocks in Europe and Japan have outperformed U.S. stocks,” Jeffrey says.
“Protectionism broadly, and tariffs specifically, have historically boosted inflation while causing economic growth to slow, which could make policy setting by the Federal Reserve more difficult, and lead to ongoing bouts of market weakness and heightened volatility,” says Schwab Chief Investment Strategist Liz Ann Sonders. “The economy still looks healthy and we believe the upcoming earnings season will be solid, but the expectations bar is now set high, setting up the possibility of underperforming those loftier expectations.”
Bonds could rally in the short term, says Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research (SCFR). “Investors often move to Treasury bonds as a safe haven when the stock market declines,” she says. “Also, an extended slowdown in the economy due to trade conflict would likely result in lower interest rates as demand slows.”
However, in the long run the news may be more negative than positive for bonds, Kathy says.
“Tariffs and trade conflicts tend to raise the cost of imported goods, lifting inflation, even while slowing economic growth,” Kathy says. “The bond market could be caught between rising inflation and slowing growth, causing corporate bond prices to decline relative to Treasuries.”
What long-term investors should consider now
Periods of market volatility can be a good time to review the timeline for your goals, says Anthony Davidow, asset allocation strategist for SCFR. For long-term goals, short-volatility matters less than a diversified portfolio and time in the market, he says; for short-term goals, reduce risk and revisit your investment plan.
Investors also might want to consider portfolio rebalancing, Anthony says. “During periods of volatility, clients may choose to rebalance back to their long-term strategic asset allocations,” he says. “Uncertainty can often lead to opportunities.”
The takeaway for traders
Further selling could trigger technical selling programs again, says Randy Frederick, vice president of trading and derivatives at Schwab. Despite Friday’s sell-off, the strength of the mid-week rally left the S&P 500 index (SPX) just slightly above its 200-day SMA (simple moving average), unlike on April 2, when it breached the 200-day SMA and the -10% correction line. However, the risk remains that further downside moves could trigger technical selling programs, Randy says.
Meanwhile, the Cboe Volatility Index® (VIX®) is below levels it hit during the first correction in early February, but volatility remains quite elevated, with the VIX closing above 20 in nine of the past 11 sessions, Randy says.
“With China’s announcement that they would continue to match any and all additional tariffs proposed by the Trump administration, traders should get used to the idea that higher volatility is the new normal,” Randy says.
Patience is key, Randy says. “As tech shares continue to face selling pressure and the trade spat with China escalates, relief may not come until earnings season begins, and that is still more than a week away,” he says. “Traders should exercise extreme patience and wait for at least a couple of consecutive solid up days, before they consider adding equity exposure.”
What You Can Do Next
Focus on the long-term. If you’ve built a solid financial plan and a well-diversified portfolio, it’s best to ignore the noise and focus on your long-term goals. Market volatility is unnerving, but it’s a normal—and normally short-lived—part of investing.
Learn more. Read and watch Schwab’s experts discuss strategies for weathering market volatility.
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