A friend of mine from Craigs Investment Partners recently shared this with me in response to the market upheavals of recent times:

I wanted to reach out to communicate on the recent tariff announcements by President Trump, and their impact on the markets and your portfolio.

As I am sure you have noticed, the markets have experienced significant volatility following the announcement of new tariffs.  While this can be unsettling, it's important to remember that market fluctuations are a normal part of the investment landscape.

Following their announcement, the major US share market index (the S&P 500 index) has fallen 10.5% over the past two days, with fears that the tariffs could drive the US into recession.  Other markets have also declined, but by varying amounts. 

For example, the NZ share market has closed today ‘only’ down 4.4% from when the tariffs were announced.  In addition, the NZ dollar has depreciated by 4.8% against the US dollar, meaning that the offshore drop in, for example, the US share market, is not as bad in NZ dollar terms (the NZ dollar often tends to weaken when offshore markets are weak, therefore tending to act as a bit of a shock absorber).  A weaker NZ dollar will also help our exporters,

With fears of a potential recession, interest rates have also fallen sharply.  This will benefit bond and fixed income valuations, so the ‘income’ side of your portfolio will actually have risen in value, this acting as a useful mitigant against any sharemarket declines. 

With our current Official Cash Rate 3.5%, market expectations prior to the tariff announcements were for it to reach a low point of just over 3.0%, but this has now dropped to an expected low of 2.75% by the end of the year. 

Besides helping the economy, any interest rate drops will also add support to our sharemarket, both from a valuation perspective, but also because so many of our companies are high dividend payers, with dividends becoming increasingly attractive if interest rates decline.

 While Donald Trump is unpredictable, if his intention was to bring countries to the negotiating table then he appears to be succeeding.  For example, since the tariff announcements, over 50 countries have already reached out to the US to negotiate the tariffs, with over the weekend key countries Vietnam and Taiwan offering to remove all tariffs.  It should however be noted that China has announced reciprocal tariffs in response, but has also called for negotiations to resolve trade differences in a mutually beneficial manner.  I would expect that these negotiations will lead to a reduction in tariffs and alleviate most of the current market pressures, but of course one cannot predict the timing and extent of any tariff reductions. 

Taking a step back

Unfortunately, volatility is part and parcel of investing for the longer term.  For example, the S&P 500 has suffered 34 falls of 10% or more over the past 65 years since 1960 (so slightly more than 1 every 2 years on average).  While never pleasant, investors have been rewarded for staying the course, with $100 invested in the index in 1960 now worth around $64,400 (an average annual return of 10.5% per year, or 6.5% per year after inflation).

Historically, markets have shown resilience and the ability to recover from downturns, so maintaining a long-term perspective is crucial during these times.  What matters most is where the markets will be in 5 or 10 years' time.  Our portfolios are designed with this long-term outlook in mind, focusing on sustainable growth and resilience through various market cycles.

We also design your portfolio so as to provide diversification across economies and asset classes.  This approach helps mitigate risks and smooth out returns over time (for example the positive effects of including fixed interest as mentioned above). 

By investing in quality companies, most of which pay dividends, we can ensure that cash flow is still being generated for your portfolio.  Interest bearing investments also help to provide stable income.  If you have regular income requirements from your portfolio, then this will not be affected by current share price movements.

The US market in particular is currently extremely oversold, which often indicates the potential for a sharp rebound.  Oversold conditions can present opportunities for long-term investors as markets tend to recover over time, and sometimes selling can be somewhat indiscriminate, thus providing opportunities.