Our Trade Tensions Playbook

Though it comes as no surprise, escalating trade tensions have made for a difficult investing environment. “We believe fiscal stimulus will offset proposed tariffs and that tensions between the U.S and China will not devolve into a full-blown trade war,“ noted LPL Chief Investment Strategist John Lynch. “As a result, we maintain our positive stock market view, as well as our economic growth and earnings forecasts for 2018.”

In response to the ongoing trade tensions, which continue to rattle markets, here are the key elements of our investing playbook:

  • Stick to your plan. It is always best to have a plan before you need it, so market volatility doesn’t knock you off track. Those who may decide to reduce risk in portfolios should set some conditions under which they would return to target allocations.
  • Look for opportunities. Volatility can create attractive investment opportunities. The industrials sector may be one such opportunity for suitable investors.
  • This volatility is normal. Despite last week’s losses, the S&P 500 Index has returned 4% year to date. Stocks on average have experienced a midteens drawdown each year, and a little bit more in a midterm election year; so far this year’s has been about two-thirds of that.
  • Stay diversified. International equities have underperformed the S&P 500 in May and June by as much as any two-month period since 2008, as our LPL Chart of the Day shows. But that doesn’t mean suitable investors shouldn’t invest overseas (monitoring global benchmarks in addition to domestic provides useful perspective). We continue to like emerging markets equities on a tactical basis.

We acknowledge that trade tensions may escalate further, leading to additional market volatility. When volatility occurs, we plan to reinforce our tactical and strategic positioning in portfolios, consistent with our playbook, favoring stocks over bonds, small caps over large, value over growth, cyclicals over defensives, and U.S. and emerging markets over developed international. Get more in-depth insights later this afternoon in this week’s Weekly Market Commentary.

 

IMPORTANT DISCLOSURES

Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market. Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies. The prices of small cap stocks are generally more volatile than large cap stocks. Value investments can perform differently from the market as a whole. They can remain undervalued by the market for long periods of time.

Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Tactical portfolios are designed to be monitored over a shorter time frame to potentially take advantage of opportunities as short as a few months, weeks, or even days. For these portfolios, more timely changes may allow investors to benefit from rapidly changing opportunities within the market.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The economic forecasts set forth in this material may not develop as predicted.

All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. All performance referenced is historical and is no guarantee of future results.

The Morgan Stanley Capital International Europe, Australia, Far East (MSCI EAFE) Index is a capitalization-weighted index that tracks the total return of common stocks in 21 developed-market countries within Europe, Australia and the Far East.

The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets.

The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.

This research material has been prepared by LPL Financial LLC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

The investment products sold through LPL Financial are not insured deposits and are not FDIC/NCUA insured.  These products are not Bank/Credit Union obligations and are not endorsed, recommended or guaranteed by any Bank/Credit Union or any government agency.  The value of the investment may fluctuate, the return on the investment is not guaranteed, and loss of principal is possible.

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