Getting anxious is not a viable strategy in this choppy, unpredictable equities market environment wherein a quick presidential tweet can make or break your portfolio. No one knows how long the trade war will drag on, and extra-skittish markets require protective measures and above all, clear thinking.
For one thing, while I’m not a huge proponent of staying all in cash for long periods of time, there’s nothing wrong with keeping some dry powder for upcoming opportunities when the tariff war posturing heats up. Volatility should be viewed as a chance to buy your favorite stocks, cryptocurrencies, etc., at a better price, but you can only take advantage of depressed asset prices if you’ve got the cash handy.
If you’re thinking of hiding out in U.S. government debt-based assets (Treasury notes, bonds, or bills), be aware that China, the largest foreign owner of U.S. debt, has been dumping their holdings. In fact, during the 12-month period ending in March, China’s stockpile of U.S. government notes, bonds, and bills fell by $67.2 billion, representing a 5.6 percent decline.
And that could just be the beginning, as China could press the financial “nuclear button” and divest itself of more U.S. debt assets as the trade war escalates: “That could really roil financial markets and it could end up doing some pretty significant damage,” notes Mark Cabana, Bank of America’s head of U.S. rates strategy.
Courtesy: U.S. Treasury, Financial Times
The fact is, U.S. bonds barely beat the rate of inflation and imminent rate cuts are likely to exacerbate the situation. With the 10-year Treasury note rate near 2.3 percent as I write this, it’s time to consider other safety nets for your portfolio.
A balanced portfolio of stocks and precious metals can help us to withstand an escalating trade war, even if China opts to press the financial “nuclear button” and sell off the bulk of its U.S. debt assets. A combination of physical gold and silver, along with shares of carefully researched development and exploration (i.e., mining) companies, could stand you in good stead when push comes to shove.
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Cannabis is a commodity that typically isn’t sourced from China, so a selection of best-in-class cannabis stocks could bolster your portfolio when the trade war ramps up. Companies that profit from the cultivation, extraction, formulation, branding, marketing, and distribution of CBD and THC products could flourish even if the tariff war extends through next year.
If you’re really in the mood to get defensive, you might consider taking a position in utilities stocks, which tend to be less susceptible to market cyclicality and could really shine when the bond market collapses. Besides, utilities stocks often pay out healthy dividends, which you can collect regardless of the political turmoil going on in the world.
Courtesy: NYSE, Market Realist
Generally speaking, taking a position in strong dividend payers isn’t a bad idea during these uncertain times. To quote Brett Owens, “Payout growth like that is proven to throw an updraft under share prices when the markets get skittish due to any kind of worry: trade spats, terrorist attacks, wars – you name it.”
Therefore, it might be worth shifting your attention from non-dividend-payers like Alphabet and Facebook to consistent dividend kings like Kinder Morgan, Walgreens, Altria Group, 3M, Bristol Myers Squibb, and Leggett & Platt. While all companies will be impacted by trade war tensions, these companies can at least pay you to hold their shares while you wait for the inevitable resolution.
It’s also not a terrible idea, in my opinion, to lighten up on companies involved in steel production, agriculture, and automobiles, which are directly in the crosshairs of the ongoing trade battle: take a glance at the multi-month chart of U.S. Steel’s stock for an illustration of the damage done to companies in the hardest-hit sectors.
With an open mind and some rebalancing and re-allocating, a protracted trade war need not be a source of anxiety or frustration. Good investors don’t let political turmoil bother them; if anything, it’s precisely the opportunity they’ve been looking for.
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