The Motley Fool

US President Donald Trump Just Dropped a Bombshell. What Now?

On Friday, the US-China trade war took a turn for the worse. First, China said that it would be raising tariffs on US$75 billion on American goods.

And 12 hours later, Trump responded by saying he would increase existing tariffs on US$250 billion worth of Chinese goods to 30% from 25% on 1st October.  He also said that the United States would tax the additional US$300 billion at 15% instead of the originally announced 10%. These levies are expected to take effect on 1st September.

The tit-for-tat rhetoric has become a common theme over the last year or so, with neither party willing to back down. Earlier in the day, Trump, through a tweet, “ordered” that American companies “start looking for an alternative to China”. 

The news caught investors on the back foot. Market participants in the US wasted little time in pushing stocks lower. The S&P 500, an index representing 500 of the largest companies in the States, plunged 2.5% following Trump’s tweets. 

So, what should investors do now?

The trade war will undoubtedly have an impact on American companies who rely on China for goods and supplies, and vice versa. There will even be knock-on effects around the world as economists expect the escalating trade war to cut global growth by a few basis points.

Some economists have already forecast that the US will face a recession either in 2020 or 2021. That said, I don’t think that investors should push the sell button just yet.

Although near-term earnings are likely to be impacted, history has shown us that the best companies will always find a way to prosper in the longer-term.

This is a good time to bring up a quote by Warren Buffett. He once said:

In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”

Even when the economic situation seems impossibly tragic, corporate America continued to reward patient investors.

Buffett also reminded us:

“In the 54 years (Charlie Munger and I) have worked together, we have never foregone an attractive purchase because of the macro or political environment, or the views of other people. In fact, these subjects never come up when we make decisions.”

Armed with this advice, instead of fretting over near-term earnings, investors should continue to hold on to their stocks that they believe have outstanding long-term prospects.

Yes, a trade war will likely impact many companies and result in slower growth or even declines. But fundamentally sound companies with a prudent team will eventually find a way forward.

Stay logical

Instead of investing based on emotions, we need to stay logical and make decisions based on a fundamental understanding of a company and its valuation. At a time of panic, fundamentally-sound companies may start to trade at valuations below their true value. This is when patient investors can find bargains that will provide great long-term returns.

I am also a firm believer in the innovativeness and resilience of humans as a whole. Eventually, I believe that logic will prevail and decision-makers will ensure that policies are made that will not lead to self-destruction.

With so much negative news, it is easy to start wanting to “cut your losses”. However, in periods such as these, we should put our emotions aside, take a step back and assess the situation. Only then can we make the right long-term investment decisions.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.