EC Global Asset Allocation Update: Tariffs Don’t Warrant A Change…Yet

There is no change to the risk budget this month. For the moderate risk investor the allocation to bonds is 50%, risk assets 45% and cash 5%. We have had continued volatility since the last update but the market action so far is pretty mundane. The initial selloff halted at the 200 day moving average and the rebound carried to just over the 50 day moving average. That is about “as expected” as you can get for a stock market correction. We did have another bout of selling that was halted above the initial low and that too is pretty classic market action. All in all, what we’ve seen over the last month is a textbook case of a correction. At least so far. 

While the overall allocation is unchanged, there are changes to the composition of some of the asset classes. Momentum is part of our process and we are trying to take advantage of it where we can while maintaining a well diversified portfolio.

One of the most common investor mistakes I see is allowing your political views to color your investment process. How many Republicans let their dislike of President Obama affect their portfolio decisions? How many Democrats have let their opinion of Donald Trump and Republicans more generally impact their asset allocation? Politics, especially in more recent times, is an emotional experience with many people today viewing almost everything they do through a political lens. I think that is to our society’s detriment but that’s a topic for another day. When it comes to investing, emotion is your enemy and that means politics needs to take a backseat when you start thinking about how to achieve your financial goals.

President Trump announced last week that he would be implementing tariffs on aluminum and steel based on national security concerns. While I personally find it hard to believe that tariffs are warranted on those grounds, there seems little doubt that the President has the authority to impose these tariffs. And despite push-back from steel and aluminum users across a spectrum of industries, the President seems intent on following through with his threat (Note: The President made the tariffs official while I was writing this). So we are about to get another set of tariffs on top of the ones already imposed by this administration (Canadian soft lumber, washing machines and solar panels). Is anyone in the Trump administration aware that washing machines require steel and aluminum to manufacture? Will the steel tariffs negate the cost advantage gained by the washing machine manufacturers in the earlier tariffs? I have no idea and I’d bet my last dollar that no one in the Trump administration does either. This is what happens when you start micro-managing – some might call it central planning – the economy. 

In case that last paragraph didn’t make it clear, let me state openly that I have a visceral, negative reaction to protectionism. It is rooted in a lifetime of being taught that Smoot-Hawley was a significant cause – maybe the main cause – of the Great Depression. It is rooted in my beliefs about individual freedom and the right of individuals to trade freely without government interference. But I will also acknowledge that these are emotional responses. The word visceral means “relating to deep inward feelings rather than to the intellect”. I could spend the rest of this update detailing all the reasons I believe these tariffs are unwise from an economic as well as a geo-political standpoint. I could use that reasoning to make changes to our portfolios that align them with these beliefs. And those changes might in the end be the correct ones –but they wouldn’t be in accordance with the process I’ve developed for making investment decisions. 

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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Gary Anderson 3 months ago Contributor's comment

This is an interesting and well written article. The question remains, will the massive shorting of long bonds strike fear in that market? The Fed has to be jealous of those bonds. Stock investors should watch the hawkish Fed, like a hawk.