Opinion: Stock market volatility alarms global markets: Is it different this time?

This year has already been one for the record books. The U.S. stock market hit new all-time highs in February. Over the next eight weeks, global financial markets sold off by $10 trillion. Shortly after that, the Dow Jones Industrial Average posted the largest single point day in its history, up nearly 3,000 points (about 7.8%). That same day, the S&P 500 posted a 9.5% return and later went on to record a nine-day win streak, a run last seen 20 years ago. The S&P 500 took a breather, then erased all the losses for the year and crested into positive territory in mid-May.

What should you do with your portfolio given the record-breaking volatility?

When uncertainty and market turmoil strike, the go-to phrases seem to be “but it’s different this time” or “these are uncharted waters” or the always-trendy “new normal.” The truth is that it’s all really the same story with similar endings, but different plot twists.

In most storylines, the Federal Reserve is often blamed for destabilizing the global economy. The president of the United States is a polarizing character and perhaps given too much credit and too much blame for the status of the markets and the economy. So, is it really different this time? Have these waters not been charted? Is this “normal” really new?

Let’s unpack what’s been going and stitch it back together with actionable ideas.

Quick history on tariffs
The Smoot-Hawley Tariff Act of 1930 was signed into law to tariff imported goods, primarily to protect American businesses and farmers from foreign competitors at the onset of the Great Depression. One thousand economists signed a petition pleading for President Herbert Hoover to veto the bill. He chose not to veto the bill and took a passive stance on tariffs. This greenlit more tariffs, which turned out to be disastrous.

As predicted, dozens of countries retaliated, and international trade stalled. Many economists blamed the act for prolonging the Depression and cited it as a cautionary tale. 

Voters were outraged, and Hoover, Smoot and Hawley all lost their seats in the 1932 election. Franklin Roosevelt became president, and Congress passed the Reciprocal Trade Agreements Act in 1934, in which Congress gave President Roosevelt temporary power to negotiate reciprocal trade agreements without their approval.

Current situation
On April 2, President Donald Trump declared that foreign trade and economic practices have created a national emergency. Through this declaration he invoked the International Emergency Economic Powers Act, which allows him to act alone to mitigate threats to U.S. national security, foreign policy or economic activity.

The “emergency” can be overturned by a veto-proof supermajority vote; however, that is unlikely given the Republican majorities.

Regardless, it appears that progress is being made and resolutions are forthcoming with respect to the new rules of international trade.

On May 8, President Trump announced a trade deal with the U.K.  On May 12, President Trump announced a de-escalation of trade negotiations with China for 90 days. The crippling 145% tariffs the U.S. put on Chinese imports dropped to 30%, and China will reciprocate by reducing their 125% tariff on U.S. imports to 10%. As we’ve seen before, this is subject to change.

Maybe lessons were learned from the Great Depression and economic prosperity can find balance with tariffs, but only time will tell. In April, the U.S. collected $16.3 billion in tariff taxes, double that of last year, and another stat for the record books.

Actionable ideas
Although no one knows what the future holds, the storyline has played out in short order. Once again, when faced with market volatility, a knee-jerk reaction could prove costly. Perhaps the actionable idea here is to take no action at all, and stick with your well-thought-out, long-term investment strategy. 

Over the last 20 years, the best days in the stock market clustered within 15 days of the worst days. This phenomenon was tested and held true in April. So, is it really different this time?

Until clarity overcomes uncertainty, nobody knows all the plot twists and turns that lie ahead. As long as your asset allocation matches your long-term goals, stay the course through these (un)charted waters, and never let fear drive your investment decisions. Along the way, remember that there’s nothing new about economic uncertainty and market volatility. They’re joined at the hip and have been – and always will be – normal.

Andy Drennen is a certified financial planner and senior portfolio manager at Simmons Private Wealth in Springfield. He can be reached at andy.drennen@simmonsbank.com.