Monday, Aug 5th 2019

Stocks Fall as Trade War Escalates... Again


This is the 25th downturn of >5% in the markets since 2009. Zoom out and don't let the headlines dictate your investment strategy.

You may be asking "why are stocks down?" lately. We don't see the driver being "new news." Like much of the past year, the culprit seems to be a combination of trade war tensions and global geopolitical conflicts.

Stocks Down on U.S.-China Trade Tensions... Again##

Global stock markets fell on Monday on U.S.-China trade tensions. Both countries have escalated tariff threats recently:

  • Last week, President Trump announced 10% tariffs on an additional $300B of Chinese goods starting Sept. 1st
  • China retaliated over the weekend by ordering state-owned enterprises to halt all purchases of agricultural goods from the U.S.

Tit for tat. It seems like every week there's a new threat, then a tentative handshake deal, followed by another threat. Market volatility has been following suit.

The media added their usual dose of superlatives, of course. "Global stocks were in disarray after China escalated the trade war with the US by devaluing the yuan to fall below its 7-to-1 ratio with the US dollar for the first time in a decade."

Zoom Out##

Zooming out, this is the 25th correction of a >5% decline that the market has seen since the lows in March 2009. There have been plenty of reasons to worry over the last 10 years. We posted the below chart back in May and it's still relevant:

SP 500 Corrections

All of these corrections seemed like the end of the world at the time. People panicked, sold their stocks, and moved to cash or bonds.

During the 25 times you may have worried about your stocks being down >5% in the past 10 years, here's how a patient long-term investor would have fared:

Mkt Chart

Quick Reminder on Tariffs##

We've talked at length about the Titan composite's minimal exposure to U.S.-China tariffs given the asset-light nature of the companies.

Apple is the only Titan company affected in a material way given it imports a great deal of its components from China. Tariffs would increase those import costs and decrease profits, all else equal. We estimate a 4-11% hit to earnings if Apple absorbed the full impact without increasing its iPhone prices at all, which we think is unlikely.

Instead of rehashing our thoughts on tariffs, let's reflect on the attractiveness of U.S. stocks today broadly.

Attractiveness of U.S. Stocks##

As we explained in our recent video on Paradigm Shifts, the S&P 500 is offering a ~6% earnings yield today (the reciprocal of the 17x P/E ratio -- it's what a stockholder is effectively being paid to own U.S. stocks).

Compared to the ~1.9% "risk-free" yield on 10-year U.S. Treasury bonds, we think U.S. stocks offer attractive returns today -- particularly the high-quality compounders that comprise the Titan composite.

Not only that, but the S&P's dividend yield is roughly 1.9%. That's higher than the yield on "risk-free" 10-year U.S. Treasury Bond (!). This means U.S. companies are paying you more in dividends than the risk-free rate, plus those companies could likely grow earnings to deliver even higher returns. Historically when this has happened, the market has proceeded to power materially higher in subsequent years.

Very simply: we believe this correction is yet another opportunity for long-term investors to arbitrage these short-term macro concerns and scoop up high-quality businesses on sale.

Our Advice##

If you're pulling out of stocks because you're scared about a downturn, you may want to zoom out and see the bigger picture. The typical leading indicators of a recession (e.g., sharply slowing GDP growth, runaway inflation, uptick in unemployment rate) don't appear to be flashing red right now. We remain constructive on the U.S. economy and market.

Historically, times like these have been fruitful for the long-term investor who actually adds more capital to her portfolio, rather than withdrawing. Lower market prices (like we're seeing today) without a deterioration in future earnings growth prospects (which we don't believe we've seen) is usually a great setup for forward returns.

Patience is not just a virtue in investing. It's how the best long-term investors take advantage of the emotional traders unwillingly to look "wrong" in the short term.

Buy when others are fearful.

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