Instead of asking “who is surprised?”, I should ask “who isn’t surprised?”.
The stock market declines as a result of Trump’s tariffs. I am not surprised, are you?
Tariffs are a tax. In this case a tax on imports. While some taxes are necessary, the over the top implementation of them has soured financial markets.
A large segment of the entire economy is dependent on foreign trade. Some of it is in direct trade in foreign made goods or goods made in the U.S that are exported, but much of it are components that go into other things that get assembled. So much everything is affected.
Why I Don’t Panic
Watching events unfold last week is like being at a movie theater that has the volume turned up. Lots of noise and mayhem. Sometimes I might briefly forget I am just a spectator. It is easy to get caught up in the action, and my heart starts to race and my skin starts to crawl. But when the lights come on, I am back to just being a spectator.
When the markets decline in a big way, I remind myself of the benefits of being a dividend investor.
As a dividend investor, I am primarily interested in income, not capital gains. Capital gains are nice and all, but since stock prices are fickle, one cannot rely on them. Income from dividends are much more stable than dividends.
During economic declines, it is possible that some dividends may get cut or even eliminated. But any change in dividends is dwarfed by the declines in stock prices. And since the optimum approach is to be diversified, with a wide range of companies in a wide range of industries, any dividend disruption should be relatively minor.
Meanwhile, screaming headlines about specific index declines attract those who tend to panic sell. Selling at a time like this is simply locking in losses.
As previously mentioned, I suspect that fund managers are the initial bulk sellers in a market decline. Followed by hedge funds. And add automated “algorithmic trading”, you have a potent combustible fuel that once ignited to the downside, spreads rapidly and uncontrollably.
Crisis and Opportunity
Stocks go up and stocks go down. And when they go down, it can be dramatic. Since the overriding principle of Wall Street is Buy Low Sell High, we all need to wonder When Is The Low? Every dramatic decline is probably not The Low we seek. The exact Low is unknowable until long after the fact. That is why I stay invested with dividend reinvestment. I accumulate lows with every dividend issued.
Are the declines we see in the recent plunges mean that it is time to buy? It is impossible to say, but I am reminded the well-known saying “Don’t try to catch a falling knife.”
Another facet that works for me is avoiding the most volatile stocks. It’s a personal choice, but headline-making stocks are not for me. I try to stick to well-known boring dividend payers. They weather the stormy declines much better than high-flying technology marvels that usually dominate the news.
Did you panic? Let me know here.
The illustration A Cure For Melancholy is from “Plain Home Talk About the Human System—the Habits of Men and Women—the Cause and Prevention of Disease—Our Sexual Relations and Social Natures” by Edward Foote, published in 1896. Courtesy Library of Congress,
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