Fear du Jour

A trade war that continues to expand, with more countries involved and louder saber rattling. An unpredictable president. Uneven corporate earnings. An approaching election with 25 candidates, each with his or her own policies, prejudices and priorities. A stalemate in Washington, leaving important initiatives like infrastructure stranded at the curb. It’s a lot. No wonder so many people are worried, driving the market down six weeks in a row. But does all this fear make sense? What’s it mean for investors like you?

Context

Today’s fear is fresh and poignant, but let’s compare it to previous editions. We had some real worries a few years ago that also spooked investors, policy makers and central bankers. Remember when the United States lost its AAA rating? That was August 6, 2011. The first fiscal cliff? We went over the cliff on January 2, 2013 and battled a fiscal crisis for another year. I remember the universal disgust at the time with the President, politicians and the record level of political dysfunction. I hear the same complaints now even though the political turnover has been more than 75%.

Amid all those fears, 2013 turned out to be an excellent year for US investors, rising +30%. And nobody talks about the US debt rating or the fiscal cliff anymore. That’s why it is a good idea to the fears du jour at bay. Focusing on headlines and hotspots rarely helps investors improve their results.

A bumpy year

For 2019, it looks like the fear du jour will continue to disturb and distract. That is primarily because the Presidential contest has begun in earnest with 24 challengers and one incumbent. CEOs of companies hit by tariffs have a real and immediate problem to face as the election contest heats up. Even though it will be a bumpy year, the overall portfolio return for the year can be and may be a decent, high single to low double digit return. There is a persistent fear of a recession or a definitive “end” to the business cycle. Those fears are based on a very real possibility. Possibility doesn’t mean probability.

The art of dealing with the unpredictable

President Trump’s playbook includes being deliberately unpredictable, which is different from being a crazy person. His tweets and fiats seem to come out of nowhere, and they cause consternation in markets worldwide. We have already been dealing with Trump’s unpredictability for three years and we can expect more of the same. The shock value of Trump’s unpredictability is steadily waning, making it easier for investors to ignore.

Trump is not the only loose cannon. Some say Mexico is a stable country with two unpredictable presidents, AMLO and Trump. Similar charges have been made against Modi and Bolsonaro. As investors we should all be used to political unpredictability by now, and not take seriously many of the statements made by our leaders. We can further insulate ourselves by holding more in TBills and earning a modest yield until the comfort level goes up.

Look further ahead

It’s clear that trade wars will continue in some fashion for years – with China, Mexico, Canada, India and any other country that the President selects. A year from now, however, the trade war may suddenly become a cease fire zone. Trump and a lot of other politicians want to get re-elected so a reversal of punitive trade diktats could boost confidence and the economy as a result. A robust, growing economy is a great ally to have on election day. That may sound cynical, but history proves it’s true.

Confidence rules the day

Fear is a real emotion. But if it is your only emotion, you are doomed. My advice is to bring confidence to your investments. Confidence balanced with humility. The fatal mix is confidence and arrogance. I am personally confident that stocks and societal progress will continue to perform for decades but humble enough that I can’t say exactly when or where.

Our experience over the last few years has shown that people are tending to have high confidence for themselves, and low confidence for everyone else. Perhaps it is because we work with many entrepreneurs; they are confident about their own business and have a front row seat to the effect of disruption and displacement on the rest of the economy. I believe investors do best when they are cautiously optimistic and confident.

Look at your own time frame

When it comes to investing today, a good place to start is to think about your various time horizons. Do you rely on this money for income and safety today? Are there financial obligations coming up in six months, one year, or more? Will the money be donated or handed down? A shorter timeframe merits greater attention to short-term fears and threats. If you won’t be touching money for decades, the daily turmoil and buzz means nothing. In all cases, no matter your time horizons, own quality assets.

Every year is unpredictable, this one maybe more than most. We can help you sort out what that means for you and your investments.