Recently, the stock market had its biggest one-day drop since April. This happened because tensions grew between the United States and China over special metals and trade fees. While this quick selloff worried some investors, markets bounced back after the White House used friendlier language about trade. For people investing for the long term, these ups and downs might feel familiar after a time when markets were relatively steady.
Even with uncertainty around trade fees this year, markets have done very well. The S&P 500, Nasdaq, and Dow have all gained more than 10%. The bond market has also helped portfolios, with the Bloomberg U.S. Aggregate Index up 6.7%, which is unusually strong for bonds. International markets have done even better than U.S. markets, with developed markets up 21.9% and emerging markets up 27.0%. Given this context, it’s important not to let one bad day and negative news headlines change our investment plans.
Instead, market swings should remind us that short-term ups and downs are a normal part of investing. Keeping a long-term view is still the key to financial success. Understanding what caused the market reaction and keeping your portfolio properly balanced can help you stay focused on your long-term goals.
Recent trade tensions and special metals
The recent market ups and downs resulted from China placing new limits on exporting rare earth metals. In response, the White House threatened to add another 100% tariff on Chinese goods on top of existing ones. This continues the back-and-forth that has created uncertainty for investors and businesses all year. Fortunately, the White House seems to have backed away from these threats and suggested that negotiations could happen in the coming weeks.
What are rare earth metals and why are they at the center of this tariff battle? Unlike many other goods and services that the U.S. imports, rare earth metals come primarily from China. While these materials aren’t actually rare in nature, China has built up strong mining and processing capabilities over many decades, surpassing all other countries. These materials are essential parts of many high-tech devices including smartphones, electric cars, batteries, military systems, and advanced electronics.
For these reasons, rare earth metals give China one of its strongest advantages when negotiating trade and foreign policy with the U.S. and other countries. Experts estimate that China currently controls about 70% of global rare earth production and nearly 90% of processing capacity. This makes the rest of the world dependent on China for these materials. The U.S. has stockpiles of rare earth metals and has issued orders to increase production, but this will take time.
Negotiations over rare earth metals are just one part of the administration’s trade policy with China. As the chart above shows, the U.S. continues to buy much more from China than it sells to China, creating a trade deficit. Reducing this imbalance while encouraging manufacturing in the U.S. has been one of the administration’s political goals.
The results so far have been mixed. While some manufacturing has returned to the United States and new investments have been announced, supply chains can’t shift overnight. The fact that the job market has weakened recently hasn’t helped: according to the August employment report, manufacturing jobs had declined by 78,000 this year.
For investors, it’s hard to know if new tariff threats are serious or part of ongoing negotiations. This can lead to quick changes in how investors feel and how markets behave. For this reason, it’s important not to overreact to headlines. Let situations develop while focusing on longer-term trends. This was true during the first trade war in 2018 and 2019, and investors who overreacted earlier this year would have missed the quick market recovery.
Market swings have increased after a calm period
The latest market moves have increased uncertainty and volatility. This isn’t surprising since investors have been concerned about the market’s forward price-to-earnings ratio around 22.5x and worries about whether the rally in artificial intelligence stocks can continue.
While it’s important to understand what drives the market, history shows that periods of volatility often create the best investment opportunities. Short-term concerns often lead to better prices, which help long-term portfolios. The fact that it’s challenging to invest during volatile periods is exactly why investors who have the courage to do so are rewarded.
The accompanying chart shows the relationship between the VIX index (a measure of stock market volatility) and how the S&P 500 performed one year later. Historically, spikes in the VIX have often led to strong returns in the following year. This happens because many investors are fearful of entering the market or sell at the wrong times. This shows how counterproductive it can be to overreact to market swings.
Markets have performed well despite negative sentiment
While the 2.7% decline on October 10 was the fourth worst day of the year for the S&P 500, it’s important to keep perspective. The accompanying chart shows that market declines of 5% or more happen regularly, even during positive years. While this year has felt volatile, the number of pullbacks has been quite average compared to market performance over the past 45 years. In fact, the market has exceeded expectations this year with the S&P 500 rising 31.5% from its April “Liberation Day” low, reaching over 30 new all-time highs so far this year.
The point is not that the market always goes up steadily, because it certainly doesn’t. Instead, periods of market uncertainty are both normal and expected, and investors should always be ready for short-term turbulence. Avoiding the tendency to worry about every new development that might derail the market is one of the keys to long-term financial success.
The bottom line? Short periods of market volatility can be challenging but are normal and expected, especially as trade tensions between the U.S. and China continue. History shows that periods of heightened uncertainty, while uncomfortable, often present the greatest opportunities to patient investors.
We are an independent financial services firm helping individuals create retirement strategies using a variety of investment and insurance products to custom suit their needs and objectives.
Advisory services offered through EGSI Investment Management, Inc., a Registered Investment Advisor with the State of Ohio. Insurance services offered through EGSI Financial, Inc.
Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. None of the information contained on this website shall constitute an offer to sell or solicit any offer to buy a security or any insurance product.
Any references to protection benefits, safety, security, or steady and lifetime income streams on this website refer only to fixed insurance products. They do not refer, in any way, to securities or investment advisory products. Annuity guarantees are backed by the financial strength and claimspaying ability of the issuing insurance company. Annuities are insurance products that may be subject to fees, surrender charges and holding periods which vary by insurance company. Annuities are not FDIC insured.
The information and opinions contained in any of the material requested from this website are provided by third parties and have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. They are given for informational purposes only and are not a solicitation to buy or sell any of the products mentioned. The information is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual’s situation.
Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. None of the information contained on this website shall constitute an offer to sell or solicit any offer to buy a security or any insurance product.
Any references to protection benefits or steady and reliable income streams on this website refer only to fixed insurance products. They do not refer, in any way, to securities or investment advisory products. Annuity guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. Annuities are insurance products that may be subject to fees, surrender charges and holding periods which vary by insurance company. Annuities are not FDIC insured.
The information and opinions contained in any of the material requested from this website are provided by third parties and have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. They are given for informational purposes only and are not a solicitation to buy or sell any of the products mentioned.
