Trade War, Recession, Election – Panic or Buy?

Michael Vodicka

President at Vodicka Group, Inc.
President and founder of the Vodicka Group. Licensed investment advisor and globally syndicated financial journalist.
Michael Vodicka

Stock market volatility has been picking up in August – on display with Friday when the S&P 500 fell 2.5%. Today I am going to explain why stocks are getting more volatile, what I expect in the next 12 months and how my clients can adjust their portfolios to better manage.

US stocks are having a very good year.

  • The S&P 500 (SPY) is up 14% in 2019.
  • The NASDAQ 100 (QQQ) is up 17% in 2019.

 

However – despite the solid gains, US stock market volatility has been picking up. That up tick in volatility is being driven by four key factors that everyone needs to understand.
September and October are Volatile Months for Stocks: September and October are historically two of the most volatile months of the year for US stocks.

US and China Trade Relations: the trade battle between the US and China has been heating up and that’s creating some uncertainty about global trade and economic growth. If this gets solved it would be give socks a nice boost. But at this point the Street is starting to recognize that this trade battle could drag on for years.

Recession Threat: Investors are also nervous about the threat of a recession. Recessions are a natural part of the business cycle. And as I’ve written before, a recession doesn’t mean stocks will crash. Here’s a link to some research on recession’s and stock performance.

Recession in 2020? Here’s How Stocks Perform

The 2020 US Presidential Election: Investors are also nervous about the 2020 presidential election will weigh on stocks. After some doing some quick research, those fears may be unfounded. Taking a look at the last 100 years, US stocks have typically performed well during election years.

Stock Market Performance During Presidential Election Years

What Should We Expect Moving Forward?I am still confident in the US economy and stock market. I don’t think we are going to see a recession in 2020 and I do not expect to see a big sell off in stocks.

However – I am expecting to see volatility increase in the next 12 months.

Here is my advice for how to navigate the next 12-15 months as the economy and stocks work through these head winds.

Young Investors: Young investors should focus on the long-term opportunity and try not to worry about short-term volatility. If you are nervous about the next 12 months, a great way to get more defensive is to sell stocks and use that cash to buy bonds. Bonds offer more stability than stocks and are good for capital preservation instead of growth.

Older or Retired Investors: This is a good chance to look at your mix of stocks and bonds. If stock volatility is making you nervous, increase your allocation to bonds.

The Big Picture on the Next 12 Months

Market volatility is picking up. I am expecting more of the same in the next 12 months because of US, China trade relations, a potential recession and the 2020 US presidential election. If you’re nervous about weakness in stocks, think about increasing allocations to bonds. Bonds are good for stability and capital preservation.