Weathering the storm – how investing meaningfully in the time of Trump can help avoid shocks

As market volatility in the wake of Trump’s tariffs hits, investors and savers around the world are being reminded of the risks of turbulent times. The value of funds, managed funds or any kind of shares or fixed interest bonds as well as property can be impacted. It is important to stay calm when you see your hard-earned savings impacted by market changes.

In uncertain times, it's natural to feel uneasy when your investment balances dip, but market ups and downs are part of the journey. While returns are never guaranteed, history shows that market declines are often followed by stronger recoveries. Staying calm and focused on the long term is key.

You can draw comfort from the past - declines have always been followed by larger increases according to Barry Coates, CEO at Mindful Money, a New Zealand-based charity established to help consumers invest their money ethically.

Coates offers some thoughts on what is currently happening in politics and financial markets, and ways to weather the current storm, including:

• Prepare for ongoing risk and volatility

• Avoid taking unnecessary risk

• Invest in line with your values.

What’s happening?

In a remarkably short window – his first 100 days, Trump as those he’s appointed have implemented extreme policy changes. Laws and policies protecting the environment, reducing greenhouse gas emissions and supporting vulnerable people both in the US and around the world were swept away, along with a fundamental change to the post-WW2 mechanisms for global cooperation.

However, for financial analysts and investors controlling the large pools of capital that move global share markets, the results were initially positive. The blizzard of Executive Orders and announcements of tariffs understandably cast doubt on whether Trump’s autocratic decision-making is good for business. There has already been a sharp fall in share markets and many analysts are predicting that political meddling and policy uncertainty will lead to an ongoing global economic downturn.

So, what should investors be doing?

1. Prepare for ongoing risks and volatility - Trump’s announcement of increases in tariffs for exports to the US saw a steep slide in markets. Over the next seven weeks, the S&P 500 fell 19%. The US share market recovered some of that ground in April as most tariffs were postponed, and at the end of April, were down by 9% from their peak.

In Australia, New Zealand and Europe, share markets have largely recovered. Even China, initially facing tariffs of 145%, has recovered most of the initial share market decline by late April and what has been seen as a Trump backdown regarding China has had a positive market impact internationally.

So, can concerned investors now breathe a sigh of relief? Not yet.

The effect of rapid policy changes on the real economy is still emerging. The International Monetary Fund (IMF) and others have downgraded their forecasts for economic growth in the face of disruptions to supply chains and investment plans. Uncertainty and abrupt policy shifts are bad for business. Another recession, starting from the major economies, is possible.

At the same time, tariffs on imports will raise costs for business and prices for consumers, particularly in the US. The prospect of stagflation -- stagnation coupled with inflation -- makes it difficult for central banks to act. Lower interest rates fuel inflation while higher interest rates could deepen a recession.

In the longer term, the undermining of the mechanisms to keep international peace and economic stability has eroded trust and international cooperation. Unilateral action by the US, in support of “deal-making” creates huge risks for smaller countries caught between the US and China. As the African proverb says: “When elephants fight, the grass gets trampled.”

This calls into question any assumption that this will be a short downturn and a quick recovery. History shows that few recoveries from share market declines are as quick as the five-month recovery from the COVID-induced downturn. And it took six years for share prices to recover from the Global Financial Crisis and eight years from the Dotcom bubble.

The implication for investors is that the “Trump slump” may be far from over. As we are reminded by most financial advisers, this doesn’t mean you should sell your shares or retreat to a less risky fund. As shown over successive share market downturns, markets will bounce back.

Investors should look carefully at the risk profile of their investments, especially if planning a major purchase, such as buying a home or an impending retirement. The risk level investors feel comfortable with depends on many personal factors and it’s worth considering all implications before making big investment decisions and talking to your financial adviser.

2. Avoid taking on additional risks - The Trump administration has removed many of the policies that have supported renewable energy and the climate transition and some of the regulations on fossil fuel development. However, this does not change the underlying economics globally. The costs of renewable energy and storage, particularly solar and batteries, continue to fall. Research shows that using renewable energy to generate electricity is lower cost than coal or gas in most cases. Meanwhile the cost of electric vehicles is also falling, and the range and availability of charging stations is increasing.

Trump’s backtracking on climate change action has not changed the warnings from the International Energy Agency (IEA) that demand for oil, gas and coal will fall before the end of the decade, and the decline may be steep. Yet most of the major oil and gas products are not heeding the warnings and are continuing with new production. They face a growing risk of stranded assets -- reserves and production infrastructure that will not be needed as production declines.

The record of financial returns from the oil and gas sector has been abysmal over the past decade, increasing by 10% compared with the market increase of almost 300%. As climate impacts intensify and renewable energy investment increases, the risks from fossil fuels are likely to intensify so screening out fossil fuels continues to be both economically and ethically sensible.

The same logic applies to many other categories of unethical investment. Companies that perform badly on human rights, animal cruelty, gender equity or environmental damage are far more likely to be exposed than in the past. With greater transparency and reporting by companies with solid Environmental, Social and Governance (ESG) practises, those stepping back or not valuing ESG good practise are vulnerable to brand and reputational risk.

3. Choose ethical options - Most financial advice starts with the observation that markets invariably rise again after a fall, and you should not try to time the market by selling your shares or retreating to a less risky fund during a downturn. Generally, that is good advice.

But the full version of the advice is often shortened to say that investors should stay in their current funds and investments during volatility and wait to see how the market responds or, more importantly, stay within the same risk category.

Overall, there is evidence to show that investing ethically provides good returns. On average, decades of research shows returns from ethical investing are at least as high, or higher, than traditional investing. Analysis shows ethical investments have a good record of weathering downturns. This means, you can do well, as well as doing good by investing inline with your values.

Barry Coates

Mindful Money co-CEO