Risk vs volatility

Last week, Trump lost his patience with China and decided to increase tariffs from 10% to 25% on 200 billion Chinese products (50 billion were already at 25%). He mentioned that the trade balance with China, an additional 325 billion, will follow if China responds. China will likely respond with tariffs on its American imports. All of which brings short term volatility on the stock markets. Let’s not forget Trump will shoot for a strong economy in 2020 with the elections closing in, which could play in China’s favour, were they to decide to postpone the agreement. Trump will have to make concessions.

The International Monetary Fund (IMF) world economic growth outlook in 2019 weakened to 3.3%, the slowest rhythm since the 2008 financial crisis. In January, the IMF had estimated 3.5%, but the decline can be explained by the political uncertainty, which in turn reduces business investments and disrupt supply chains.

In the United States, the economic growth from the first quarter of 2019 was higher than what economists had planned. Indeed, GDP grew by 3.2% while predictions were 2.5%. The increase in productivity was also good with 3.6% which is good news to sustain this economic growth without inflation.

Risk vs volatility

Let’s take the example of your house, which you would rather keep for the next 20 years. What is your biggest risk: discovering a crack in the building’s foundations or a decrease in valuation the next year based on the city’s evaluation? In my opinion, the crack hurts a lot more.

The value of stock funds fluctuates a lot year over year based on news reports. But in the long run, a company delivering satisfying results, like a well-maintained property, should increase in value. The moment you decide you want to sell or disburse your investments is when you need to think strategically. What matters is to have a good long-term view when it comes to the equity portion of your portfolio.

And since risk-free rates could be impacted by inflation for many years, you won’t have much choice but to accept volatility, but remember it is not risky, but volatile.

American stock market

The S&P 500TM Index has been falling for a month around 2,850 points. Job creation has been very good in March and April in the US. In this context, it is difficult to imagine a recession since job creation is so vigorous.

Please note that this statement reflects my opinion and does not constitute investment advice. Each person’s unique financial situation will affect their appropriate choices.

I invite you to send me your questions, to which I can respond in the next newsletter for the benefit of all.