As the stock market crash intensifies following US President Trump’s tariffs, it is time to pause, reflect, assess and finally act to reposition our portfolios.
- Don’t panic and rush to make decisions – take a few days off without making any decisions.
- Focus on what you can control – your health and wellbeing, nature, hobbies, family, your job/business.
- Drown out the panic induced noise – Switch off the news. Rather read some well written newspaper and magazines articles.
- Assess how much cash you have to invest.
- Assimilate the cause and the main thesis causing the crash. – This looks at the crash from a US perspective, given most of the world’s stock market wealth is American.
•Tariffs will increase the price of imported goods in the (inflation).
•This makes goods less affordable, driving down their demand.
•In turn this will slow future growth, and consequently earnings, therefore driving down stock prices.
•Retaliatory tariffs e.g. from China, will make exports more expensive, thus slowing down demand, e .g. for agricultural products, causing an over-supply and driving down prices.
•The impact of inflation on interest rates is unclear. Either, increased inflation will lead to a hawkish stance from the Fed, increasing interest rates to combat inflation. Or, slower growth from the inflation will cause the Fed to take a dovish approach, and reduce interest rates.
•We know that Trump is in favour of lower interest rates, and wants to lower the cost of US government borrowings. Indeed, we have seen investors rush to fixed income (driving down the 10-year bond rate to sub 4%).
•Gold prices tend to increase when real interest rates decrease, because there is lower opportunity cost. - There will be winners and losers. Winners will include:
•Domestic producers competing with imports e.g. domestic steel, aluminium, local manufacturers. US Steel – $38.29.
•Agricultural commodity prices may reduce, therefore decreasing the input prices for food product manufacturers, and increasing their margins. General Mills $59.61.
•Building materials and construction companies should see greater demand as a result of combined effect of reshoring, plus increased tariffs on imported goods. Eagle Materials share price $217.
•Higher prices will cause consumers to trade down. Retailers such as Dollar General $92.62. - Strategy
•Drill down into sectors that will stand to benefitScreen companies based on earnings such as P/E, EV/EBITDA, and FCF yield to select companies that are cheap.
•Select a handful of names from different sectors to spread risk
•Start dollar cost averaging down, investing small amounts on a regular basis, since it is difficult to predict the bottom.