It will take time to fairly assess whether April 2nd — "Liberation Day" — was a success. The goals of re-balancing U.S. trade, bringing manufacturing capability and jobs back domestically, and so on, are largely long-term in nature. As such, we won't know for a while whether yesterday's tariffs were an effective tool in realizing those goals.
Today though, the main thing being liberated is money from investors' accounts. U.S. stocks are down -4.4% (S&P 500 large companies) to -6.2% (Russell 2000 small companies) as I write this mid-afternoon. Those are big losses for a single day, and they come on the heels of six weeks of lighter selling that already had stocks well off their February highs.
How do you respond to market stress?
When markets go through big declines, it's natural for fear to kick in. That's going to happen to some degree — we are human beings, after all. The question really is, "What do you do when fear knocks and how do you maintain the composure that is crucial to your long-term success as an investor?"
The best antidote we've discovered to market fear is having a firmly established investing process already in place when fear comes knocking. Then, those fears can be held up against the process, calmly evaluated, and (hopefully) sent packing.
SMI's process involves continually measuring market trends and momentum and making incremental risk management decisions along the way. Faithfully pruning and planting in this way keeps us from feeling like we need to make big adjustments on days like today.
Examples, please
Let's walk through what this has looked like in practical terms for SMI members this year.
Step One: Own different assets than everyone else. Over 13 months ago, when gold was trading below $2,050/oz., Dynamic Asset Allocation (DAA) told us to allocate a significant portion of our portfolio there. Today, we're up +53% on that position, which incidentally has barely budged during today's stock market carnage (-0.6%).
Step Two: Mentally prepare for unpleasant surprises. SMI members were mentally prepared for yesterday's big tariff announcement, largely because we've been talking about Trump's policy priorities for over three months now. That article highlighted the potential "short-term pain for long-term gain" sequencing risk involved.
That same January issue of SMI highlighted the stark change in thinking regarding global trade and the radically different priorities of this administration in this area. We've regularly discussed the high valuations of U.S. stocks and the potential vulnerability that creates.Step Three: Incremental risk management adjustments. We could list numerous examples here, but we'll consolidate for time. Commodities replaced 10% of our Stock Upgrading holdings two months ago at the end of January. That fund is down today on a steep drop in oil prices, but only half as much as the small-cap growth index (IWO) it replaced. Over the full two months since that change (including today's losses), our commodities are up nearly +4%, while small/growth stocks are down roughly -18%.
Before today's big losses, SMI's risk-management process had already pared most of our outright exposure to U.S. growth stocks, reduced our exposure to small-company stocks that are getting hit particularly hard, and just this last Friday (in DAA) exited U.S. Stocks entirely, shifting one-third of that portfolio to Cash. Just in time for this week's meltdown.
Step Four: Own different stuff, international edition. Two months ago at the end of January, we shifted the final third of DAA (other than Gold and the portion that shifted from U.S. Stocks to Cash last week) into Foreign Stocks. That's been a great move, as foreign stocks are down much less than U.S. stocks today, and even after today are still up slightly since that change was made.
Last week, we pressed the point on foreign stocks, highlighting six reasons foreign stocks seemed poised to take the leadership baton from U.S. stocks, and moving 10% of our Stock Upgrading holdings into a new foreign stock position that is down just -0.8% today (while the fund it replaced is down over -7%).
Confidence in the process reduces panic
That's not to say all our moves have been great. But it's helpful to review the incremental process moves that have gone right lately, which had our portfolios reasonably well prepared for today's big decline.
More importantly, knowing there is a carefully constructed process that will continue to guide our decisions removes the pressure to try to figure everything out on a day like today when many investors are panicking.
If you don't have such a process to inform your investing, we'd invite you to try ours.
