What to do about the tariff tantrum

This has certainly been an eventful few days. February doesn’t seem that long ago. At the time investors were awash in optimism that Trump 2.0 would be good for markets. On Valentine’s Day the ASX hit an all time high.

It is 4am in Sydney on April 8th and I awoke to a market on the precipice of crossing into bear territory in the US before rebounding. Australia isn’t too far behind with the ASX 200 falling close to 15% from the February high.

I’ve been thinking about an email I received from a reader and a quote by J.P. Morgan. The reader wrote: “If everyone followed your advice, no one would sell right now, and the market would remain steady. Obviously, that won’t be the case. So, who is selling?”

It is a good question. And J.P. Morgan can help us with the answer. He said, “In bear markets, stocks return to their rightful owners.” Think about that.

The people selling right now are playing a different game than you. They are short-term traders and trying to make a quick buck. These are the people that indiscriminately bought into momentum shares like CBA and the magnificent seven in the US.

The didn’t care about valuations. They didn’t care about taking a long-term ownership stake in a business. Their lack of conviction is being expressed in their current actions. They are individual and professional speculators who may masquerade as investors – but that isn’t who they are. You are not them. Don’t play their game.

Slowing down decision making

It is likely that you are feeling the urge to do something right now. We are wired to act when confronted by challenges. That ‘something’ could be a variety of things. It could be selling everything and hiding under your bed. It could be finding every available dollar to plough into the market. It might be adjusting your portfolio to take advantage of opportunities.

When things are happening as quickly as they are now the sense of urgency to act increases. There is a frantic nature to headlines. There are non-stop push notifications, emails and social media posts.

My suggestion is to try and slow down your decision making. Write down what you want to do and why it will help you achieve your goals. Write down all the reasons why your move could backfire.

The process of writing things down will clarify your thinking. It will encourage you to be more rational. The counter argument will force you confront the very likely possibility that what you want to do is wrong.

Once you’ve written down what you want to do wait a bit. Take a walk. Watch a movie. Go to the gym. After that share what you’ve written down with someone. Talk through it. You can even send it to me – just know I can’t tell you what to do. The point is to further strengthen or challenge your point of view by getting it out into the world. Times like this can feel isolating. Get out of your own head.

Here are some of my thoughts. You’ll notice they are open ended questions. I don’t have a crystal ball. Neither do the people confidently saying what to do.

Should you buy the dip?

A strategy is a plan of action designed to achieve a goal. Buy the dip is not a strategy unless more thought is involved than simply buying because the market is down.

At some point a sell-off becomes an opportunity. When that happens is based on valuation and not some arbitrary percent loss.

If you are inclined to buy don’t try and catch the market bottom. I tried to do that during Covid and I missed it. Instead focus on what you are buying and why. History suggests the market will overreact and there will bargains out there.

As well-known investor Chris Davis said, “You make most of your money in a bear market – you just don’t realize it at the time.” This is not necessarily a call to action. It is also a call to limit your mistakes and not do something that will prevent you from reaching your goals. Doing nothing while everyone else is in a frenzy can be the smartest move of all.

The impacts of tariffs are complicated

There is the first order effect on companies that will see the cost of their goods and services increase. There are also countless second order effects. It takes time to unravel these.

Our analysts are currently working through any changes to their estimates of the fair value of the individual companies in their coverage universe. The market has chosen not to pause and consider the impact. It never does. It is responding emotionally and focusing on the short-term. You don’t have to.

The future pathway is not inevitable

I’m not optimistic but I don’t see this as a foregone conclusion. Negotiations could happen with individual countries. Trump and Republications in congress are talking tough and focusing on the long-term benefit they hope to achieve from the short-term pain. But they are still politicians.

Many politicians lack the fortitude to exchange short-term unpopularity for long-term policy objectives. Is Trump steadfast enough to watch his poll numbers drop? That is up to you to decide. But just know there will be lots of pressure to make this self-induced crisis go away as prices creep up in the US and the economy slows.