Trump Tariffs 2.0
Igor Manukhov - Feb 12, 2025
Trade wars could create market volatility, but they are not enough to trigger a bear market. Focus on fundamentals and avoid the noise.
Last weekend almost marked the beginning of a trade war between the US, Canada and Mexico. Time will tell if we are out of the woods on that front. I received several calls seeking my opinion and the potential impact on portfolios.
The right answer is boring: Investors should focus on fundamentals of what they own, avoid panic, and stick to their approach. Naturally, I have a chart for this.
Fortunately, we have experienced something similar before – during Trump’s first term. Trade wars did create market volatility. I marked various hostile trade announcements by Trump with green vertical lines. You can see how market performed afterward by following a pink line.
2018, in particular, was a rough year.
However, I want to point out that the market did not always decline following a hostile trade announcement by President Trump. In some instances, the market actually went up after the announcement leads me to believe that it was not all about Mr. Trump and there were other forces at play.
One of my favourite risk indicator is high-yield bond spread. I wrote about it before. As a quick refresher: the black line in the chart below represents high-yield bond spreads. This metric reflects the premium investors can receive get by investing into low-quality, risky bonds as opposed to high-quality bonds. For example, a reading of 10 means that if government bonds pay 4%, high yield bond holders get 4%+10% = 14%. When stock market starts to panic, these spreads increase. There is no benefit to sell before these spreads start to expand.
Notice how markets only took significant beating when high-yield spreads began to expand rapidly (blue circles). Currently, we have one of the lowest historical high- yield spread readings on record. It currently stands at 2.7%. That could change, and when it does, I will be playing defense. But for now, I will recommend to hold and not react to the noise.
