We are introducing a new barometer at GreenPort. We are calling it the “Crying Wolf Barometer.” We will update it from time to time and send it along to you as market conditions dictate. The genesis of this indicator was a discussion from our investment meeting. Specifically: is this latest sell-off the end of the nearly 10-year-old bull market, or is it another dip that eventually will be dismissed as a false alarm?
The reason we call it a “crying wolf barometer” is that we do expect there to be another bear market in the future. In the story, the shepherd has created so many false alarms, the villagers ignore all his warnings. The moral of the fable, “no one believes a liar, even if they tell the truth,” leads us to our quandary as investors. While we don’t mean to imply that media pundits are liars, we are aware that one day, the news cycle may precipitate an actual bear market. Our challenge as investors is to stay vigilant and distinguish between false alarms and a real turn in the market.
We decided to research and annotate any material sell-off since 2008 where there was a clear reason in the news cycle for the sell-off. The credit crisis of 2008 caused the last bear market. Since then, we found 21 identifiable market dips that caused concerns about another bear market.
So, what is our opinion about the most recent “crying wolf”? This most recent sell-off is over the fear of a trade war being sparked by President Trump’s tariffs on steel and aluminum. The tariffs are specifically targeting China and what is widely regarded as unfair trade practices that include theft of intellectual property, barriers to entry requiring American companies to give majority ownership to a Chinese partner to be allowed to access Chinese consumers, and tariffs that are currently imposed on American exports to China. A trade war would be catastrophic for the world economy and world financial markets. If there were a trade war, we would become bearish and expect a bear market to follow. We think it is unlikely at this point that we will see a trade war. Total trade with China, our biggest goods trading partner, is $578bln. We import $462bln and export $116bln, which leaves us with a trade deficit of $346bln. A trade war is bad for both net exporters and net importers, however net exporters (China) are harmed more because it is a direct and immediate negative impact on economic growth. Net importers (U.S.) feel the pain through higher prices, which will eventually hurt earnings but is slower moving and less impactful. Given that both parties have a lot to lose, we hope that they resolve it before a trade war derails a global economy that is finally gaining momentum. It’s more likely than not that we will see several more wild market swings before we know for sure. We understand this can be an anxious time for investors, please don’t hesitate to call about any concerns you may have with your investments. The GreenPort Team