Stock markets across the world have been in turmoil these past few weeks with the impacts of trade wars and the British farce over exiting the European Union.
Alternating positive and negative speculation and news about the American negotiations with China for a trade deal push stock prices down and up. The unexpected imposition of a tariff on Mexican imports to the United States has roiled the market fears more.
The Toronto Stock Exchange benchmark average, up 14 per cent at one point this year, lost three per cent in May. The index is still up by double digits since New Year’s Day as this is written.
The question in many investors’ minds: can the market hold these gains or will it melt down further?
No simple answer exists to that question. Too many other factors intercede in the answer.
Among these factors sits the potential for a depression like the 1930s when tariff/trade wars brought economies across the world into recession, double digit unemployment, business closures and stock market losses.
The poorly thought-out trade sanctions on China and Mexico will stoke inflation in the U.S.A. China is not about to make a trade deal, knowing Donald Trump has between two years and six years left in the White House.
The Chinese took hundreds of years before exposing their society to open trade with other countries. Another two to six-year wait is nothing for them.
Trump’s frustrations at Chinese stalling his demands could lead to more trade sanctions and disruption of economies. The high-tech industry has already felt the sting as Trump and then China walled off this globally interdependent sector.
The temptation for investors is great to withdraw from the market until matters clear up with some certainty but that could mean pulling out for up to six years and missing out on the dividends being paid regularly.
In a stock market scenario of global uncertainty prudent caution is needed.
Short-term market speculators can have a field day, however sudden political trade interference cuts their odds of success.
Long-term investors need to show caution as well.
Some ideas: if an investor has a stock with large long-term paper gains but thinks the stock is vulnerable to sudden trade actions, partial or full sale might be considered.
Remember a 100 per cent gain is equivalent to 12 years of better than average gain.
Know what you own. Check holdings carefully to see if the companies are exposed to trade issues and take action accordingly. Try and raise cash for the coming bargains.
And inspect the finances of your holdings. Low debt or no debt is preferable. Business models generating steady cash flow are also preferable.
Be prepared for the roller coaster ride of your investing life as volatility surges.
Ron Walter can be reached at ronjoy@sasktel.net
