“All progress takes place outside the comfort zone.”
~ Michael John Bobak, Digital Artist
Question: With the U.S. and China trade war discussions, markets feel like a roller coaster ride. Would owning bonds increase the stability in my portfolio?
Answer: In my opinion, the answer is yes, bonds do have a place in most portfolios. The specific questions like how much of a portfolio should be in bonds, and what kind of bonds or fixed income investments should someone own, depends on individual needs, goals and risk appetite.
Much like emotional teenagers, markets don’t always act rationally, making investing both an art and a science. Reactions to fundamental data and interpretation of that data are easily influenced by different viewpoints that may or may not be one-hundred percent logical. Markets are prone to monetary mood swings, as we’ve seen.
Trade tensions between the U.S. and China have triggered recent market mood swings. Understanding the root causes for the trade war tug-of-war may be helpful in comprehending recent volatility and the potential impact on your investments.
Many people believe that for years, China cheated and stole intellectual property in efforts to gain an unfair advantage. The U.S. led the way for decades, developing and innovating products which is often an expensive proposition. By skipping the costly research and development phase, and moving right into the production phase, China was able to march double-time and in essence catch-up to the rest of the world in the production process of goods and services. China rapidly advanced from a plow and ox society to having John Deere tractors equipped with GPS, Sirius Radio, Netflix and air-conditioning.
Looking at data will provide some context to the lopsided nature of the trade tariff tug of war. Gross Domestic Product is defined as the total value of goods and services provided by a country in one year. According to the CIA World Factbook, China’s GDP per capita is $16,600 while per capita GDP in the U.S. is $59,500. Translation: companies can pay much less for labor in China due to their lower cost of living. The rationale behind the U.S. tariffs is to level the playing field.
Additionally, the International Monetary Fund (IMF) states that U.S. GDP is ~$20.5 trillion or roughly 53% larger than China’s GDP at ~$13.4 trillion. The U.S. imports about $580 billion from China or 4.3% of their total GDP. In contrast, China imports about $179.2 billion from the U.S which represents 0.90% of U.S. GDP, far less than what China imports from us. This makes the importance of these trade talks a bit skewed. It’s also reported by the IMF that Chinese imports are roughly 18% of total US imports, leading some to observe that most of these imports could be obtained from other countries.
Having the facts and data is useful when making observations and taking action in any situation. We know that at times market behavior can be illogical and extreme in both directions, up and down. We can look back to the 1990s when Federal Reserve chairman, Alan Greenspan coined the phrase Irrational Exuberance during the dot-com bubble of the 1990s when the importance of a company’s financial information like earnings was perhaps not properly understood.
It can be argued that prior to the trade tariff, tug-of-war markets were overly excited and assumed there would be a trade compromise. With the deadlock or delay in the process, markets erratic behavior is not surprising. It’s fair to say that eventually, time has been known to bring rationality back to the markets.
Bonds and fixed income investments may be able to bring a measure of discipline to the difficult process of equity evaluation and timing. A portfolio’s allocation to fixed income shouldn’t be assumed to provide safety without understanding what you own, why you own it and the risks involved.
In its simplest form, a trade war is a consumer tax. The free markets will eventually seek the level at which consumers support that tax. The current trade war in itself isn’t significant to the overall U.S. economy, yet the emotionally charged discusses will likely continue to affect the markets. Don’t lose sight of the potential predictability of fixed income investing or alter your portfolio based solely on this trade war hype. Stay focused and invest accordingly.
The data and information contained herein was obtained from sources considered to be reliable, but accuracy and completeness are not guaranteed. Mention of specific companies’ names, information or any opinions expressed constitute a solicitation for the purchase or sale of any security referred to herein. Investors should discuss the risks inherent in bonds with their Financial Advisor. Risks include, but are not limited to, changes in interest rates, liquidity, credit quality, volatility, and duration. Past performance is no assurance of future results.
Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed. All investments contain risk, including loss of principal. Views are as of May 15, 2019 and subject to change based on market conditions and other factors. “Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.”
This article provided by Darcie Guerin, CFP®, Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may be reached at 239-389-1041, email firstname.lastname@example.org. Website: www.raymondjames.com/Darcie.