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Senior Portfolio Manager James McFarland fills in for Chris Perras and discusses what’s happening this week in the markets, and goes over a few important things to remember in light of several recent Presidential tweets.

James McFarland: Good afternoon, everyone. This is James McFarland, Senior Portfolio Manager and Head of Trading for Oak Harvest Financial Group. Welcome to the August 2nd edition of Stock Talk: Keeping You Connected to Your Money. CIO Chris Perras is taking a break today, so I’m privileged to be able to join you all once again. Each week here on Stock Talk, we share with you our views on the market, what we see happening now, and what we see coming down the pipe for the economy and the markets. We also focus on education, sharing with you what we’ve learned about how the stock and bond markets work and what makes them tick.

I’m recording this on August 2nd, 2019 at 9:30 AM Central Time. Today, we’re going to take a quick look at what’s happening this week in the market, and particularly what’s come out in just the last couple of days. Let’s just jump into it.

Yesterday, August 1st, 2019, the President sent out four tweets. In these four tweets, he let the world know China had decided to renegotiate the trade deal just prior to signing, China had failed in their promise to buy large quantities of US agriculture, China had failed to stop the flow of fentanyl to the United States and that Americans were still dying, and that because of these things, on 9-1-2019, an additional 10% tariff would be placed on $300 billion worth of products and goods coming from China to the United States.

The markets did not respond well to this. The S&P, the Dow, small caps, Japan, and most international markets dropped sharply and heavily on this news. Bonds rallied and yields fell. As of the time of recording, the S&P is down about 2% for the week. Big picture, what does this latest development mean? Is it time to panic? Well, in a word, no. No, it is not. It is time to do something, though. It’s time to remember that the broader market is still fine. We’re expecting at least a 5% late summer pullback or perhaps a little bit lower, perhaps, 6% or 7%. We could be seeing that get started now.

Regardless of the tweets and the tariffs, our overall outlook for the broader stock market for the rest of the year has not changed. Remember also that volatility equals opportunity. As volatility increases, as we see names start to drop sharply, we’re going to be hunting for good opportunities to put money to work. As others are panicking, that’s exactly when the real opportunities to make money in the stock market appear, and that’s what we look for.

Now, the tariffs and the tweets are having an impact, of course. No one is saying they’re not, but remember, the US economy is 75% services and consumer-based and about 25% manufacturing-based. The tariffs are going to have more of an impact on that 25% of the economy that’s manufacturing-based, companies like CAT, Deere, and so on, but 75% of the economy is going to be less affected. Though, with this latest round of tariffs, there is potential for a growing impact on the US consumer.

The impact of increasing tariffs and an ongoing trade war, really, it’s going to impact anything that has economic sensitivity. That’s areas like small caps, international stocks, financials, and cyclical. It is in these areas where we believe there has been a lot of untapped potential in the market. This most recent action by the President, potentially expanding the China tariffs even further, could also impact our view on that potential in the market.

I will tell you that we are absolutely monitoring these developments very closely and will make adjustments the instant we feel is necessary to keep our client portfolios in line with their objectives and risk tolerance. It’s also time to remember that with this president, it pays to not jump the gun. I think by now, we’ve all seen enough to know that, well, with the President, things can change pretty quickly, and that just because we get a couple of tweets, it doesn’t necessarily mean that something is going to play out a particular way. “With Donald J. Trump, always wait at least 48 hours before reacting,” is what a friend of mine told me. I do think that’s right most of the time.

The severe reaction we saw in the market right after those tweets went out is people panicking, basically. If the situation changes again, those same people will be panicking in the other direction. We’ll see a lot of panic buying. We think it’s more sensible to calmly assess a situation, wait and see what’s actually going to develop, and then make appropriate and informed decisions based on realistic potential outcomes.

I do want to emphasize that I’m not talking about political outcomes here. Whether you think the President is taking the right long-term approach for the country and whether the tariffs are painful but necessary or not, it’s not what we’re looking at here. We’re just looking at things from a market’s, from an investing perspective. We are investment specialists. To do our job right for you, we do need to interpret things in light of potential investment outcomes rather than from a more political or ideological perspective.

Now, lastly and most importantly, as the markets may be starting to look uncertain, it’s also time to remember your long-term investment and financial plan are still in place. It’s important to continue to tune out the noise and keep a strong long-term perspective. We’re investing for the long term. We make long-term decisions based on long-term views, not short-term noise, headlines, or tweets. As a final word, I encourage you to read the market update we will be releasing on Monday. We’re going to release a more detailed update than usual and dig into some more of the details of what we think the impact of these expanded tariffs could be.

That will bring us to the end of today’s episode of Stock Talk. Thank you so much for listening. If you enjoyed the show today, please share it around. If you’re starting to feel worried about the markets, I’d encourage you to go listen to episode two of my own podcast, The Investor Mindset, which is entitled Do Something. That episode is all about dealing with those pesky emotional impulses that can appear when the market does start to look shaky. You can find it and a lot of other good content on our homepage, oakharvestfg.com in the investment management section under the ideas and insights tab, or just go to google.com and search for Oak Harvest Investor Mindset, and it should be the first or second result that you get.

I also encourage you to read our second half outlook penned by Chris Perras. It’s also available on the website. If you have any questions or would like to find out if we can help you with your portfolio, give us a call. Our number is 281-822-1350. Once again, this has been James McFarland. This has been Stock Talk. Have a wonderful weekend. I’ll talk to you again soon.

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