My tips for your money in an uncertain climate + Trump's tariffs explained

Hi everyone,

Another wild markets week with investors feeling skittish. This is because some of the comments and policies of President Trump just don’t make financial or economic sense. The US markets are now officially in “correction” territory - down 10 per cent since the record highs last month, following another dive last night.

This uncertainty is spooking markets and it looks like we’re going to have to get used to it. So this week I’ve focused on what is happening and how you can be protecting your family finances and investments.

In this newsletter:

• Is Trump good for business? Time will tell.

• My top tips for managing your money in times of uncertainty.

• How to look after your share portfolio when markets have the wobbles.

• Superannuation funds take a hit.

• Trade surpluses and tariffs. What is Trump talking about?

Is Trump good for business? Time will tell!

I’ve written about ‘Trump Trade’ before - that is the stocks and sectors which benefit from a pro-business regime in the White House.

But since the presidential inauguration, the decisions coming out of the White House have been anything but pro-business and financial markets are now panicking. Markets hate uncertainty and with Trump 2.0 there is almost daily uncertainty around tariffs, relationships with key allies and pretty outrageous claims around Greenland, Panama Canal and Canada.

Trump has become the great disruptor of politics. Some of the things he is doing just seem crazy. But. Europe does need to pull its weight in funding NATO and not just leave it to the Americans. Something does need to be drastically done to cut US government spending to try and bring its budget back into balance and cut government debt, which is costing them $US1 trillion a year in interest.

The question is whether you tackle those big issues with a wrecking ball or with a considered thought-out plan?

Take a look at the reaction of the S&P 500 (the key US markets index) to Trump’s first term as President compared to this second term.

I also often write about Warren Buffett, the so-called “Oracle of Omaha”, who is regarded as the best investor in the world ... and the bloke is in his 90s. Have a look at the graph below to see what he has been doing as global markets continually broke record highs.

He has been building a significant pile of cash in his investment company Berkshire Hathaway. Waiting for the inevitable market pullback.

“I always say you should get greedy when others are fearful and fearful when others are greedy,” is one of his great investment pearls of wisdom. Think about it. This is one of those little investment gems to live your life by and very appropriate at this stage of the investment cycle.

And he lives by his own advice. Last year’s record-breaking rise in the US stock market saw investors get greedy and push listed company valuations to unrealistic levels. So, he went to cash and took profits at those unrealistic levels.

Now he’s waiting for the market to crash and take advantage of people’s fear as they sell out and valuations drop to realistic levels, or below.

The issue now is whether this correction, since Trump’s inauguration, is the start of a longer, more sustained pullback with all the speculation of a US economic recession.

I know the headlines of this week have been pretty grim but remember the US market is back to about where it was on the US election day in November.

I also think the next chart puts it in perspective as well. March has always been a bad month for the sharemarket. The chart combines the monthly performance over a year of the US sharemarket for the last 20 years.

As always, it seems, we’re at the bottom for the year. Or is this year going to be different? The next month will be an important determinant on whether sharemarkets bounce back and revert to the 20-year norm … or not.

Sorry, I know it’s a bit cheeky. But this bumper sticker in the US made me laugh:

My tips for managing your money in times of uncertainty

Media coverage of sharemarket corrections can spook even the most professional investor. It can be scary.

Before building the bunker, it’s worth remembering a couple of things.

I love the advice of Warren Buffet from his biography, Snowball:

• “Cash combined with courage in a crisis is priceless.”

• “Don’t invest in things you don’t understand.”

• “Don’t try to catch a falling knife until you have a handle on the risk.”

In other words, in times of crisis it’s critical to understand the environment and assess the risks. So it’s all about being careful.

It’s also worth remembering investment markets move in cycles. Every boom will end in a bust and every bust will end in a recovery. The timing of these movements is unknown.

Markets are driven by the emotions and psychology of those people operating in them. It’s so easy to get depressed at times like this, to think it’s the end of the world and we’re all doomed.

Despite what the doomsayers preach (usually when they’re selling a book based on fear), history tells us that taking a contrary view during a crisis can be the most rewarding time to invest.

Contrarian Investment Strategies was a book published in 1998 which analysed 11 major post-WW11 crises. It found that a year after each of these crises (with the exception of the Berlin Blockade) the average gain in the US sharemarket was 25.8 per cent and 37.5 per cent after two years.

Since then we’ve had the September 11 attack in 2001 which sent US shares plummeting 11.6 per cent over the following five trading days. One month later, stocks had completely recovered.

Remember September 15, 2008 when the collapse of Lehman Bros sparked the Global Financial Crisis and the doomsayers were predicting the collapse of the banking system? The US sharemarket dropped 16 per cent in the following year, was down 10 per cent after two years and had retraced the falls after three years.

More recently, sharemarkets collapsed during the COVID lockdowns but have been consistently breaking record highs since lockdowns were lifted.

History tells us to keep these crises in perspective.

Even so, unless you’re a professional and have the skills, it's time for us amateurs to tread carefully as the new White House regime continues to disrupt.

So here are my thoughts on managing money during uncertain times.

Family finances

Keep on top of your debt reduction program and try to build an emergency stash equivalent to three-six months salary. With talk of the tariff wars feeding into inflation, the outlook for interest rates is now even more uncertain despite the recent cut.

There are also predictions this could lead to an economic recession in the US and Europe, which means banks will become more cautious.

So keep your credit lines in place because accessing new loans could be harder and more expensive in the future. Also, job security will be important. It’s a good idea to be nice to the boss and make sure they understand you’re a valuable asset to the team.

Capital security

When professional investors get scared they flee to safety. For them that means protecting their capital rather than getting the best return. Often they move into the US dollar because it’s the most liquid market in the world (which ensures accessibility) and there is little chance of the US going broke (we’re all in strife if it does). For us, the equivalent flight to safety is having a foundation platform of investments in bank term deposits, savings accounts and cash.

Shares

Get advice from your financial planner or broker, but when it comes to the sharemarket, the focus should be on quality and yield. Think big strong companies with a proven track record and which pay good reliable dividends.

Fund managers and brokers also focus on so-called “defensive stocks” which are companies that perform well during economic downturns. Supermarkets (because everyone has to eat), breweries (tough times drive us to drink) and gaming stocks are a couple of examples.

Property

Like shares, quality and yield are the drivers of property investing during a crisis. Well positioned, easily rented properties should be the focus because these are the properties which hold their value best and are also able to be sold quickly.

Superannuation

Check the investment option you’re in. The closer you are to retirement, the more conservative the mix of options should be. Balanced, fixed interest and capital secure provide the best protection in a crisis.

Gold

The precious metal has traditionally been a great store of value against economic and financial upheaval. But it can also be a currency play against fluctuations in the US dollar.

Gold has been the best performing investment asset over the last 12 months as investors fly to safety and the falling Australian dollar has magnified the gains for local investors.

Gold bugs swear by the metal, but it can have a life of its own which doesn’t always go according to plan. Even so, it’s certainly worth holding some gold in a portfolio.

Looking after your share portfolio when markets have the wobbles

Investment markets are understandably jittery at the moment. If history has taught us one thing, it’s that markets are unpredictable and situations can change astonishingly quickly.

So here’s how to protect your portfolio against a potential share market downturn:

Diversify

Diversification is a mantra in financial circles. The logic is simple: if you put all your money in only one investment, it’s clear your fortunes will live and die by its success.

But splitting that money fifty-fifty and placing it into two investments with a low correlation (say, a business in a different industry) will protect you if one of them falls over. Adding a third will reduce risk still further, and so on.

It’s important to take a holistic view of your investments when thinking about diversification and not just focus on the share portfolio. Don’t forget about your superannuation, property and any fixed income or business investments too.

Buy great businesses

Great businesses don’t fall over in a light breeze.

Even with a perfect storm on the horizon, a great business will batten down the hatches and emerge stronger than before. The market knows this and will often support the share price of a solid company when times get tough and put a rocket up the future recovery.

But how do you pick them? There’s always an element of risk, but a little common sense, a lot of research and a good understanding of the particular business will go a long way. Ask yourself these questions:

• Does the company have a strong business model, a good market position and a sustainable plan to grow earnings over the next few years?

• Is it profitable?

• How experienced and stable are management?

• Are there any major headwinds or risks that could change any of the above?

Once you can answer these questions, you’ll start to see great businesses all over the place.

Take out insurance

Many brokers will allow you to set a stop-loss order on your share positions. A stop-loss will automatically process a sell order if the price of the share falls below the level you set, and therefore limit potential losses.

While they can be a great way to protect your portfolio, be careful with how you use them. If you set them too high, it’s possible to trigger sell orders during even minor market corrections.

A lot of professional investors also use strategies to ‘short’ the market using things like options and Exchange Traded Funds. Shorting a stock, or market, is where an investor “sells” first hoping to “buy” later to complete the transaction at a lower value and make a profit.

It’s complicated, but effective, and you should only do it in conjunction with a good broker or adviser.

Get advice

Not sure if you’re sufficiently diversified? Are stop-loss orders a bit over your head? A financial adviser or broker can help you to figure it all out.

An adviser will assess your risk profile and help adjust investments accordingly.

For investors with a low tolerance for risk, an adviser will be able to put a strategy in place to protect you as much as possible in the event of a major downturn, while keeping things on track to achieve your financial goals.

Superannuation fund returns down for the month

Monthly superannuation returns turned negative for the month of February. Despite an uncertain environment, it was only the second negative monthly return for the financial year; however, it was clear that signs of discomfort were emerging as markets digested the looming risks of tariffs and the effects that may result in the global economy.

Leading superannuation research house, SuperRatings, estimates the median balanced option fell by -0.8 per cent in February.

Despite the Reserve Bank of Australia lowering interest rates in February, both Australian and international sharemarkets, the key drivers of super fund returns, declined over the month as the (then) incoming President’s agenda came into focus.

The impact of tariffs on China and potential flow-on effects to the Australian economy in particular influenced Australian share expectations, offsetting any potential benefit from the reduction in interest rates.

The median growth option fell by an estimated -1.2 per cent over February, while the median capital stable option is estimated to deliver a small but positive 0.1 per cent return to members.

Pension returns followed accumulation return trends, with the median balanced pension option falling by an estimated -0.9 per cent. The median capital stable pension option is estimated to match accumulation returns at 0.1 per cent over the month, while the median growth pension option is estimated to fall by -1.4 per cent for the same period. 

Trade surpluses and tariffs - what the hell is Trump talking about?

Donald Trump’s rationale for imposing tariffs on imports into the US is that it will make imported goods more expensive and entice American consumers to buy goods made locally because, hopefully, they’ll be cheaper in price.

His justification is that other countries are taking advantage of the US by selling their goods into the world’s biggest economy but not buying American goods in return. That’s what he means by other countries having a so-called free ride.

So he slaps a tariff on them which he is trying to tell American consumers will be paid for by the exporting company. It’s nuts because it will be added to the price paid by consumers, which will feed into inflation and potentially start a new round of interest rate rises to fight inflation.

That’s why financial markets can’t believe the naivety of logic. And it goes totally against his policies in the first term of his presidency.

Trump 1.0 introduced a Free Trade Agreement with Canada and Mexico - no tariffs on any goods traded between the three countries. One big economic block. It made sense.

Now Trump says Canada and Mexico are ripping off the US. But he encouraged US companies to manufacture in Canada and Mexico because it made economic sense.

American cars assembled in Mexico will be hit with a 25 per cent tariff on components being sent to Mexico and another 25 per cent when the assembled car comes back.

Lobsters underpin the economy of the US State of Maine. They are caught in Maine, sent to Canada for processing (which attracts a 25 per cent tariff from the Canadians) and then back to American consumers with another 25 per cent tariff on top. A 50 per cent addition to the price.

That’s just two of thousands of other examples.

On the surface, as these below tables show, you can see Trump’s point. China exports more to the world than any other country and has a huge trade surplus. Whereas the US has the world's biggest trade deficit.

China's trade surplus is the largest globally at $593.9 billion in 2023, skyrocketing from $33.7 billion in 20 years. Germany ranks in second, driven by exports of cars ($174 billion) and vehicle parts ($69.4 billion). The country's top export destination was America, receiving 10 per cent of its exports.

Five of the world's largest trade surpluses are in Europe, followed by two in Asia (which includes Australia).

But Australia has had a trade deficit with the US for the last 20 years because our mining exports mainly go to Asia. Although last month we had our first trade surplus with the US because of exports of gold to America.

The US has the largest trade deficit globally by far, driven by strong domestic demand for goods such as electronics, crude oil, apparel, and automobiles.

Other factors that drive America's trade deficit include a strong US dollar making foreign products cheaper and a growing economy supported by rising incomes that enable consumers to buy more foreign goods.

Ranking in second is India, fueled by its rapidly growing economy. Today, its trade deficit is about four times higher than America, when measured as a share of its GDP.

While Japan reported a trade surplus with America and certain countries in Europe, it was offset by trade deficits in countries such as Saudi Arabia and the UAE, among others.