Selling because of the trade war turbulence could cost you a lot of money over the long term

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The volatility in the stock market has recently picked up amid an escalating trade war between the U.S. and China, but regular investors with a long term horizon are better off just riding out the tough times, even when they get pretty scary, history shows.

People who tried to time the market and therefore missed the 10 best days for the S&P 500 between 2003 and 2018 posted about half the return of those who remained fully invested, according to data from Putnam Investments. Those who missed the 20 best days saw their returns slashed by two-thirds compared to investors who stayed in.

Volatility spiked earlier this month as the U.S. and China hiked tariffs on billions of dollars worth of their goods. This knocked the S&P 500 from a record high. But many pros see this as a long-term buying opportunity as fundamentals remain positive and a trade deal is still expected.

“When you put it all together, this is a healthy time to come into the market for the long term,” said Thorne Perkin, president at Papamarkou Wellner Asset Management. “We always look at these pullbacks as buying opportunities for the long term.”

U.S. economic growth surged to start 2019. First-quarter GDP grew at a 3.2% annualized pace in the first quarter, marking the best economic start to a year since 2015.

Employers also keep hiring at a strong pace. Last month, 263,000 jobs were added to the economy while the U.S. unemployment rate fell to its lowest level since 1969. Job gains have averaged 205,000 per month in 2019.

“The fundamental backdrop is still fairly solid. The big economic — GDP, nonfarm payrolls — they keep exceeding expectations. That does not happen at the bull market’s end,” said Paul Schatz, president at Heritage Capital. “The underpinnings of the market are too strong for a bear market to begin.”

To top it off, the Federal Reserve slashed its rate-hike forecast to zero from four as inflation remains below the central bank’s 2% target.

The pivot, which came after the Fed raised rates four times in 2018, has also increased the possibility of a rate cut. Market expectations for a rate cut between now and the start of next year are at 80%, according to the CME Group’s FedWatch tool.

The strong economic data and the Fed’s pivot coincided with corporate earnings growth that has topped analyst expectations. Corporate earnings are up more than 1% for the first quarter. Analyst polled by FactSet expected corporate profits to have fallen by 4.2% to start off 2019.

“Year to date, there have been three things driving the market: perceived progress on trade, stabilization of the interest-rate environment and better-than-expected earnings. In the short term, the volatility is coming from the trade piece,” said Craig Birk, chief investment officer at Personal Capital. “The short term is really unpredictable. Long term, a lot of the things that helped drive this rally are still in place.”

The recent volatility upswing started after President Donald Trump threatened to hike tariffs on $200 billion worth of Chinese goods. Since then, the S&P 500 has dropped more than 3%. Trump later followed through on his threat and China retaliated by raising levies on $60 billion worth of U.S. products.

Higher tariffs led to increasing fears that corporate earnings growth could slow down, thus hurting the global economy.

But while tensions have flared up, strategists still expect the two sides to strike a trade deal eventually. Goldman Sachs Chief Economist Jan Hatzius wrote in a note he expects the two sides to reach a deal by the end of June. Trump and Chinese President Xi Jinping are expected to meet at the G-20 summit next month. Bo Zhuang, chief China economist at TS Lombard, noted “the fundamentals call for [a] deal.”

“With China, it’s long overdue that we keep them in check. They steal intellectual property, they do not provide fair access to markets, they don’t play generally by the rules,” said Perkin of Papamarkou Wellner Asset Management. “But to me, trade wars are bad. No one really wins in this scenario, but it certainly hurts China more.”

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