In recent weeks and months, concerns about tariffs and an impending trade war have filled the headlines. Investors are understandably uneasy due to the looming tariffs, and stock prices have fallen almost everywhere in the world, including here in Iceland. It is clear that tariffs will disrupt business operations and increase operating costs. Inflation and interest rates are also likely to rise, while demand may decrease.
Fair enough. One could certainly ask how much stock prices need to drop for general buying opportunities to emerge. But a much more important question is whether tariffs and trade wars have the same long-term impact on all listed companies, as the market seems to assume. For instance, so far the U.S. government’s tariffs have focused on goods, while trade in services remains completely free. Furthermore, companies differ in whether they have a good plan B or C to respond to tariffs and other trade barriers.
Stock markets have, of course, tried to price in unexpected and unprecedented shocks before. These include the great financial crisis in the fall of 2008 and the COVID-19 pandemic, which began exactly five years ago. These two major price corrections offer a kind of roadmap through the uncertainty we now face with tariffs and trade wars. That is at least the view of Howard Marks, founder and chairman of the investment fund Oaktree Capital Management. That fund is currently the world’s largest buyer of distressed assets.
Marks wrote an article on September 19, 2008, just after the fall of Lehman Brothers, titled Nobody Knows. Then, in March 2020, he wrote a follow-up titled Nobody Knows II. Now, on April 9 – exactly one week after the Great Day of Freedom when the U.S. imposed tariffs on the entire world – Marks once again made his voice heard with an article titled Nobody Knows (Again).
Marks’s message in these three articles is the same: Investors must accept uncertainty as a given. If people have believed the future was certain, they have been completely misguided. The same applies to those investors who thought they could predict the future. It is important that investors acknowledge their ignorance and come to terms with enduring uncertainty. Everyone must decide for themselves – is the fear of losing money stronger than the belief in profiting greatly when markets eventually shift?
Such decisions must be made in accordance with each person’s risk tolerance and intuition. Experience shows that broad market declines, like in 2008 and 2020, have created enormous opportunities for profit. But timing is everything. In reality, when markets become volatile, all companies are sold off indiscriminately and without regard to how well their operations are actually performing. This is because investors do not handle uncertainty or change well. Then, as time passes, the sheep are separated from the goats. It becomes clear that many companies were unfairly punished.
Buying stocks in a falling market is sometimes compared to catching a knife in free fall – it can work out but also cause serious injury. The reason is that all change creates both winners and losers. Even bad news can have a positive impact on certain industries and businesses in the long run. Some companies, sectors, and even entire nations are able to respond better to change than expected.
We Icelanders should certainly relate to this, given how often we’ve suffered major shocks but still managed to recover. We worked our way out of the great financial crisis of 2008, and with strong economic growth over the past four years, we’ve managed to recover the production loss caused by the COVID-19 era. In the same way, we will find ways to work our way out of this trade war. Perhaps it’s because, as a nation, we’ve managed to adopt the mindset Marks recommends – to acknowledge uncertainty and accept it.
Fair enough. One could certainly ask how much stock prices need to drop for general buying opportunities to emerge. But a much more important question is whether tariffs and trade wars have the same long-term impact on all listed companies, as the market seems to assume. For instance, so far the U.S. government’s tariffs have focused on goods, while trade in services remains completely free. Furthermore, companies differ in whether they have a good plan B or C to respond to tariffs and other trade barriers.
Stock markets have, of course, tried to price in unexpected and unprecedented shocks before. These include the great financial crisis in the fall of 2008 and the COVID-19 pandemic, which began exactly five years ago. These two major price corrections offer a kind of roadmap through the uncertainty we now face with tariffs and trade wars. That is at least the view of Howard Marks, founder and chairman of the investment fund Oaktree Capital Management. That fund is currently the world’s largest buyer of distressed assets.
Marks wrote an article on September 19, 2008, just after the fall of Lehman Brothers, titled Nobody Knows. Then, in March 2020, he wrote a follow-up titled Nobody Knows II. Now, on April 9 – exactly one week after the Great Day of Freedom when the U.S. imposed tariffs on the entire world – Marks once again made his voice heard with an article titled Nobody Knows (Again).
Marks’s message in these three articles is the same: Investors must accept uncertainty as a given. If people have believed the future was certain, they have been completely misguided. The same applies to those investors who thought they could predict the future. It is important that investors acknowledge their ignorance and come to terms with enduring uncertainty. Everyone must decide for themselves – is the fear of losing money stronger than the belief in profiting greatly when markets eventually shift?
Such decisions must be made in accordance with each person’s risk tolerance and intuition. Experience shows that broad market declines, like in 2008 and 2020, have created enormous opportunities for profit. But timing is everything. In reality, when markets become volatile, all companies are sold off indiscriminately and without regard to how well their operations are actually performing. This is because investors do not handle uncertainty or change well. Then, as time passes, the sheep are separated from the goats. It becomes clear that many companies were unfairly punished.
Buying stocks in a falling market is sometimes compared to catching a knife in free fall – it can work out but also cause serious injury. The reason is that all change creates both winners and losers. Even bad news can have a positive impact on certain industries and businesses in the long run. Some companies, sectors, and even entire nations are able to respond better to change than expected.
We Icelanders should certainly relate to this, given how often we’ve suffered major shocks but still managed to recover. We worked our way out of the great financial crisis of 2008, and with strong economic growth over the past four years, we’ve managed to recover the production loss caused by the COVID-19 era. In the same way, we will find ways to work our way out of this trade war. Perhaps it’s because, as a nation, we’ve managed to adopt the mindset Marks recommends – to acknowledge uncertainty and accept it.
Me and my dog Balto, soaking up the winter sun. Natur doesn´t promise certaintly – just beuty.