Today, Paul addresses the reactions of markets and financial news to the announcement of a new round of tariffs at the beginning of the month. Listen along as Paul explains why market downturns are not massive “sell-offs,” are not indicators of the economy, and are not a good time for you to reevaluate the risk level of your portfolio.
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Paul Winkler: All right, so big talk this week. Of course, people can’t get enough of tariffs, tariffs, tariffs. It’s kind of like The Brady Bunch, “Marcia, Marcia, Marcia.”
Can’t get enough of this stuff. It’s all people seem to be talking about. Market movements. You have big swings.
So that’s why it’s so futile to sell because you don’t think about this, but you don’t have any time for the profits to have changed on the companies. Now you might have projections that might be changing. Maybe the projections might be lower in the future, but the big deal is since we don’t know the number, stock prices will drop even further just to reflect the greater return required to take the risk of stepping in when there’s uncertainty.
And we often say that if you look back through history, it is throughout all of history, anytime we have market downturns like that, it is always, they say, a market sell-off. And I go, “Well, it’s a market buy-up because there’s somebody on the other side of the trade that’s buying.”
It’s typically the person that has intestinal fortitude that is buying, and the person that is scared and just panicking that is selling, and it’s a transfer of wealth. I mean, that’s really how I like to put it, as historically it has been a transfer of wealth.
So you would think with all the history we have on this — we’ve got so much history on markets and how they move and how these things come about and how fast they recover when they do recover, so we talk about this all the time here — you would think that the biggest investment firms would have this down, that they wouldn’t fall prey to these types of things.
Well, just check this clip out right here. It was on CNBC. Check this out.
Speaker 1: Sanchez is chief market strategist for the Americas at JPMorgan Asset Management. Have you sold?
PW: Okay, so that’s a pretty big firm right there. JPMorgan, that’s a pretty big firm. So he’s like, “Have you sold?”
Speaker 2: So I think what investors are doing right now is looking through this report because it’s really going to be in the second quarter that we see the effect of the tariffs that were announced on Wednesday.
PW: Okay, so number one, she says, “I think what investors are doing is they’re looking through this report.” What are they looking for? Well, they’re looking for information on what they think the market is going to do based on the report.
And if the information is bad, people that are prone to selling would’ve sold already and the people that are buying would have bought already and they just buy at lower prices if the information is bad. But number one, they’re looking through the report to try to figure out what they should do.
S1: So that means you did sell something or you didn’t?
S2: I think what investors are doing is taking down some risk exposure.
S1: Are you recommending that?
S2: We do think it is prudent to take down some risk exposure. So for example, for an investor that perhaps had gotten very overweight equities, it would be the moment to be more neutral equities. For example, in fixed income as well, more prudent to take down, for example, high yield exposure and focus a little bit more on core fixed income.
PW: So there you go, right there. So your overweight equities, it would be the time to take some of that off the table and take that down.
Now, the time to have taken that down — for example, large U.S. growth stocks, which I’ve talked about in the last quarter, took it on the chin — the time to have done that would’ve been December of 2024, not wait until they’ve gone down as much as they’ve gone. And these are people managing huge, huge sums of money.
Now, if you have this chief equity strategist and you have an account with these firms, John, don’t think that this is happening in isolation. Don’t think that this person is saying that, and they’re not managing any of these portfolios in that way.
Because if they’re putting this person in front of everybody, they’re managing money. It’s often said when somebody tells you who they are, believe them, right?
So you listen to that advice about equities, first of all, then she moves to bonds. What’d she say about bonds? She says, “And then high yield.” So basically, in other words, junk bonds, take it off and put it in the higher quality bonds, in essence, is what she’s saying.
So in effect, what she’s saying is because these bonds have taken it on the chin, you need to sell those too. You need to lock in those losses as well.
Now, I would’ve never owned them at all because remember, what is the purpose of bonds in an investment portfolio? And I’ll ask somebody that knows nothing about investing this question.
You don’t have to know a doggone thing about investing to come back and say, “Well, the purpose of bonds in a portfolio is stability.”
And the high-quality bonds are actually and have actually throughout the market downturn they actually went up in value. Why? Because the demand for them increased. Because people like this are selling stocks and high-yield bonds, and they’re driving the price up of the high-quality bonds, which drives down the interest rates.
And when you drive down the interest rates, a lot of things happen when you do that. Number one, you make the ability for people to buy houses better, easier, lower costs on mortgages. You have the government debt, which is of course financed. That becomes more affordable.
Interest costs go down. People are more able to, although I’m not a big fan of buying cars on credit, the cost for borrowing to buy vehicles or big ticket items goes down.
So if you look at that and you say, “Wow, how is it that these big investment firms mess up over and over like that when we know better, they should know better?” Twenty-five years ago when I started this radio show, I had a friend of mine, I was a little bit concerned about talking and getting out there and saying, “Well, the big investment firms, they’re going to eat little Paul Winkler. They’re going to just eat his lunch.”
And he was like, “They’ll never change. They will never change.” And this proves he was dead on right about this.
Now, there was somebody from the Heritage Foundation who got on there, and he was talking about, “Well, let’s take a look at this whole thing from just a little different perspective.” And here’s what he had to say regarding the whole issue with tariffs and manufacturing.
S1: And Heritage has never liked tariffs, have they?
Speaker 3: Well, look, we’re a free trade organization at the end of the day, and frankly, we’re for free trade, not just in the international market, but domestic markets as well. We don’t like high-income taxes, we don’t like high sales taxes. Those are taxes on domestic trade.
PW: Isn’t that an interesting point right there? He’s just making that point that, well, you got high income taxes, that’s a tax on domestic trade. Now we’re talking about tariffs which are a tax on international trade.
S3: I could be wrong here, but I think one of the things the president might be getting at when he talks about his policies “haven’t changed and they won’t change.” If you listen to Donald Trump from 20 or 30 years ago, even back then, he was bemoaning the —
PW: Now number one. I just want you to pick up on what he just said right there, just really quickly. He says that “he wasn’t going to change. He isn’t going to change.”
Think about this from a perspective of a corporation. They are thinking about putting money into the United States. They’re thinking about putting money in, and there are companies already gearing up to do more manufacturing here. But how adamant would they be to put this money in the United States if they thought he was just going to change his mind in two minutes and then go a different direction?
So in a way, if we want these things to happen, they really sort have to be a little bit more stable in terms of what he says he’s going to do going forward. Now, that’s just conjecture on my part. I don’t know.
When we look at that, we say, well, could it be that he changes his mind? It is a possibility, but that is the thinking.
That is why he’s doing that is in order to just get a little bit of a buy-in from these other companies that is not going to be vacillation all over the place when it comes to these trade policies and that there’s a bit of a decision that is rooted in some of his history with regards to this. And that’s what he goes on to say.
S3: “They haven’t changed and they won’t change.” If you listen to Donald Trump from 20 or 30 years ago, even back then, he was bemoaning the fact that manufacturing is leaving this country, that we don’t make enough here, that other countries are ripping us off, that they have bad trade policies that they impose on us. So I think much of what the president is talking about and what he’s trying to fix is all of those bad things that got us into this mess, quite frankly, the high marginal tax rates, the trade abuses by countries like China who manipulate their currency —
PW: Remember that was something we heard an awful lot when Romney was running for president. “They’re currency manipulators.” And the idea being that if you can manipulate the value of your currency, you can make trade more advantageous to yourself.
So if you can weaken your currency, you can actually set it up so that your stuff is less expensive to other people and it helps with your trade and that’s why they do it. So that is really what you’re talking about.
And this isn’t anything new is really what they’re saying right here. His policy regarding this and the idea is: Can we create more stability, manufacturing stability?
There are certain things that we don’t necessarily want to bring back, but there are things that we would like to bring back. We would like to have, just to make sure that we have more stability from not only an economic standpoint but also from protection of the country in terms of defense and critical industries.
S3: — who impose all kinds of tariff and non-tariff barriers. Those are the things that I think the president wants to address and wants to fix in order to help the American middle class.
PW: So a lot of these things we look at and go, “Wow, what is it? What makes markets move really fast?” Well, panic makes market moves really fast.
So what you’ll find is that people sell into this type of thing because they just get scared. And the part of the brain that’s the front part of the brain that is the thinking, logical, literal languages there, we call it the multiple L’s because all of that stuff resides in the front brain, that shuts down.
People do this, it’s a transfer of wealth from one group of people to another. And then as time goes on, yeah, people start to go, “Oh, wait a minute, what’s really going to happen?”
I often talk about that study that showed that’s how long markets go down. If you look at how long it takes for markets to recover from downturns on average, it’s that, sometimes it’s way shorter, sometimes a little bit longer.
But the reality of it is different markets in this particular scenario have just done really, really different things. Some of the international markets did super, super well in the first quarter where U.S. markets went down.
But the whole idea here is that investors should have had, should have before — and this is something I’ve been talking about for a long, long time, and I have been adamant to make sure I repeat myself over and over — they should have had an international diversification before. Now, if you didn’t, if you didn’t, and you’re one of these people and in fixed income, high quality, fixed income, because the portfolio, as I often say, should be designed to withstand these types of things, and that’s what’s happening is that the high quality fixed income is jumping in value, which as I said, it tends to drive down those interest rates.
Because when we look at recoveries, how they occur, it’s typically because of these opposing effects. That’s why I never panic about market downturns.
I just watch and eat popcorn and just go, “Ah, there we go again.” It’s exactly what I’d expect. If markets didn’t turn down, if markets never went down, if they never vacillated, they never moved up and down or never oscillated, I guess would be a better word, if that didn’t happen, then you would have no greater returns in markets than you have in fixed income investments.
I did that whole video a while back where I took a person in CDs and I said, “Well, what if you’d taken,” I took a 60-40 portfolio, and I said, “What if you had taken the same level of income from a CD portfolio from 2000 until now?”
And we’ve had a lot of weird stuff that that’s happened from 2000 until now. Well, not only did you run out of money in the CDs, you’d be like $300,000 in a hole, I think it was something like that.
Safety is an illusion. It really comes down to it. It’s an illusion when we think that we’re going safe, that we’re going to protect ourselves and we end up bringing upon ourselves the very thing we’re trying to avoid.
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Advisory services offered through Paul Winkler, Inc., an SEC Registered Investment Advisor. Paul Winkler, Inc. does not provide tax or legal advice: please consult your tax or legal advisor regarding your particular situation. All information contained on the Paul Winkler, Inc. website, including information in our newsletters, as well as information posted on social media, is for general informational purposes only, and should not be considered an individualized recommendation or personalized investment advice. We do not intend for this website to be utilized by any persons who are covered under the GDPR.
