As if the stock market hasn't been volatile enough this year, now we face the prospect of a trade war between the world's two largest economies. It's enough to make you shift your portfolio into cash and hunker down for the rest of the year, but please don't do that.
Selling up ahead of an expected macro meltdown is one of the biggest mistakes investors make. All too often, the meltdown does not happen. Spirits quickly revive and those who sold at the point of maximum worry watch helplessly as markets race upwards. That could easily happen today.
What we have is a lot of political posturing, with President Trump suggesting he might slap another $100bn tariffs on China, "in light of China's unfair retaliation". China's Ministry of Commerce has pledged to match any of Trump's measures with "comprehensive countermeasures, to firmly defend the interest of the nation and its people". Boys, please. Simmer down.
The US does have one factor in its favour, its exports to China are relatively tiny, at just $130bn a year, against $506bn of imports, a deficit of $375bn. On the other hand, China holds $1.2 trillion of US debt. Selling a fat chunk of that could trouble the US, but not unduly. While China holds around 20% of foreign-owned US debt, this is barely 7% of the total, with much of it held in the US itself. Also, selling off US debt could drive up the renminbi, and make Chinese exports more expensive. Perhaps Trump does have the whip hand after all.
History suggests that trade wars create plenty of losers, but few winners. We all know what followed the Smoot-Hawley Tariff Act of 1930, which pushed through protectionist trade policies.
What happens next, nobody knows. US stocks look overvalued as measured by the Shiller index, currently at 32.04. China's economy is slowing as the government battles endless bubbles. The eurozone has barely reached escape speed, despite all that QE. Let's not even mention Brexit. Also, there are signs that rising interest rates and QE cutbacks are starting to slow the money supply.
If you are likely to need your money in the next year, you should consider selling. In fact, you shouldn't be in the stock market anyway. But if you are investing for five years or longer, all you can sensibly do is stay put. Selling now will only rack up needless charges, and leave you facing the difficult decision of when to buy back into the market. Also, you will miss all those juicy dividends.
Stock market volatility is back, but you can take advantage. One option is to buy on the dips, picking up your favourite stocks when prices are down, or investing in top global investment trusts like these two. Or maybe this top global exchange traded fund. Alternatively, set up a regular monthly savings plan. The trade war is bad policy, it will not last. Take advantage while you can. This is a war you can win.
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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.