Markets
Trade tensions and your investments: the risk of timing the market
By Jared Kadziolka, CFA 26 February 2025 6 min read
After two years of solid market performance fueled by AI enthusiasm and favourable economic conditions like declining inflation and interest rates, recent trade tensions have tempered investor confidence. Geopolitical events like this can stir emotions, leaving investors wondering how best to navigate the uncertainty of the current market conditions. Investors may be questioning if they should maintain their long-term focus, or if they should try to outmaneuver the market by timing their investments.
In this article, we'll revisit the fact that market uncertainty is inevitable for investors. We’ll also explore the challenges of trying to sidestep these periods through market timing, and show that remaining invested tends to provide the best investment outcomes.
Volatility of emotions and the markets
Market volatility, often sparked by geopolitical events, can be an emotional rollercoaster for investors. Particularly after a period of relative calm, it's natural to become unsettled when unexpected events such as tariff threats shake the markets. However, it's important to remember that market uncertainty is the norm, not the exception.
The chart below highlights several major news events over the past decade that triggered significant market uncertainty along with emotional responses from investors. These events serve as a reminder that volatility is a natural, albeit uncomfortable, part of the investment landscape.
Market events and 60/40 index portfolio returns - Jan 1, 2015 - Feb 24, 2025
Source: YCharts
60/40 index portfolio represented as 40% Bloomberg US Aggregate CAD, 20% MSCI EAFE Total Return, 20% S&P/TSX Composite Index Total Return, 20% S&P 500 Total Return. Portfolio rebalanced quarterly. You cannot invest directly in an index and returns do not consider any fees.
1. Greek debt crisis:
June 30, 2015. The Greek government defaults on 1.6 billion euro payment to the International Monetary Fund (IMF).
2. Oil price collapse:
Feb. 11, 2016. Oil prices hit lowest value since 2003 due in part to increased supply from OPEC.
3. Brexit:
June 23, 2016. The UK decides to withdraw from the European Union following a referendum vote.
4. North Korea missile test:
July 4, 2017. North Korea launches a long-range intercontinental ballistic missile for the first time.
5. US government shutdown:
Dec. 22, 2018. The longest government shutdown in US history at 35 days.
6. US trade war with China escalates:
May 5, 2019. President Trump announces tariffs on Chinese imports increase from 10% to 25%.
7. Iraq tensions:
Oct. 25, 2019. Mass protests against government corruption.
8. COVID-19 crash:
Feb. 20, 2020. Market crashes as coronavirus rapidly spreads globally.
9. US Capital stormed:
Jan. 6, 2021. US Capitol Building attacked by a mob in an attempted coup.
10. Russia invades Ukraine:
Feb. 24, 2022. Russia invades Ukraine in a major escalation to the simmering regional conflict.
11. Central bank hikes:
March 17, 2022. The US Federal Reserve begins hiking rates, which increase by 5.25% over next 18 months.
12. Inflation hits 40-year high:
June 10, 2022. US inflation hits a high of 8.6%.
13. Silicon Valley Bank Collapse:
March 10, 2023. SVB collapses after a bank run sends ripples through the financial system.
14. Israel-Hamas conflict:
Oct. 7, 2023. Hamas launches a deadly attack on Israel.
15. Yen carry-trade unwind:
July 24, 2024. Significant appreciation of the Japanese Yen causes popular carry trade to unwind, sinking markets.
16. Trump begins enacting tariffs on trade partners:
Feb. 1, 2025. US announces broad tariffs on imports from Canada, Mexico and China
While each geopolitical event is unique, they often trigger strong emotional responses and a desire to take action. However, looking back at the past decade, we see that the impact of these events on the global stock market is varied.
Some events, like the COVID-19 pandemic, caused a significant market downturn, while others, like the 2016 oil price crash, had a more localized impact. It's also important to remember that these events don't occur in isolation. Economic conditions, government policies, and other factors all contribute to market movements. This makes it difficult to isolate the impact of any single event, even with the benefit of hindsight.
The current uncertainty surrounding US trade policies and tariffs has led to much speculation about the potential outcomes. However, the reality is that there are countless possibilities, and it's impossible to predict the future with any degree of certainty. The good news is that regardless of what transpires, history has shown that the market tends to recover from even the most challenging events, rewarding those who remain patient and disciplined.
Exploring market timing
Instead of acknowledging our lack of control over short-term market fluctuations and riding them out, investors may understandably be tempted to try and sidestep these periods altogether. While seemingly straightforward when looking at historical charts with clear market peaks and troughs, in real-time, timing the market is incredibly challenging.
Identifying the right moment to exit the market is difficult enough, but knowing when to re-enter is often the biggest hurdle. Investors who move to cash may struggle to recommit to the market due to its inherent uncertainty. As we saw in the previous chart, the news is constantly filled with stories that can keep an investor hesitant.
As markets rise, those on the sidelines may feel they've missed the boat and that prices are now too high, leading them to wait for a pullback. Then, when markets inevitably decline, they may fear further losses and again hesitate to invest. This cycle of hesitation can continue indefinitely, causing investors to miss out on significant gains.
Case study: The high cost of missed opportunities
The chart below illustrates the potential consequences of market timing. It compares the performance of a hypothetical balanced index portfolio (40% bonds, 60% equities) over the past 10 years under two scenarios:
- Staying invested: The portfolio is rebalanced periodically, but no other changes are made.
- Market timing: The investor sells out of the portfolio during the COVID-19 market decline before reinvesting three months later.
Going to cash for 3 months durring the pandemic lows - Jan. 1, 2014 to Feb. 24, 2025
Source: YCharts
60/40 index portfolio represented as 40% Bloomberg US Aggregate CAD, 20% MSCI EAFE Total Return, 20% S&P/TSX Composite Index Total Return, 20% S&P 500 Total Return. Portfolio rebalanced quarterly. Cash is represented by Bloomberg US Treasury Bills 1-3 Month. You cannot invest directly in an index and returns do not consider any fees.
As the pandemic unfolded and markets plunged, the hypothetical investor, understandably concerned, decided to sell their portfolio to limit further losses. Unfortunately, this coincided with the start of the market recovery, which seemed impossibly disconnected from reality as the coronavirus continued to wreak havoc. Much of the world remained under lockdown with cases rising exponentially, jobs being lost, and businesses closing.
While relieved to avoid further declines, the investor soon became confused and frustrated at missing out on the rebound. It certainly did not feel like a good time to reinvest and they opted to wait for a more favourable opportunity, convinced that the market would experience another downturn.
However, the market continued to climb, and by the time they reinvested—a mere three months later, their portfolio value was significantly lower than it would have been had they stayed invested. The pandemic and its shadow of uncertainty was still far from over at this stage. It would still be many months before early vaccines would become available and many more yet before daily life would begin to regain a sense of normalcy. There would still be several more waves of infection along with new variants of the virus, but yet the market would continue to climb.
This example highlights the inherent challenges and risks associated with market timing. It demonstrated the unpredictable nature of market movements, even when the direction seems clear. The pandemic also underscored the remarkable speed at which markets can recover, making it clear that even a brief period of staying on the sidelines can significantly impact long-term returns. This experience reinforces the importance of maintaining a disciplined approach and a long-term perspective, especially during periods of uncertainty.
Final thoughts
As humans and investors, we dislike uncertainty and the emotions it can bring forward. Unfortunately, it's an unavoidable aspect of investing that we must learn to manage. Rather than attempting to control or minimize it through making and acting on predictions, investors are better off finding a path towards acceptance.
Reviewing your financial plan can also provide peace of mind by reminding you of the preparations you’ve made for such periods of uncertainty. Your plan will likely include a diversified portfolio that is aligned with your goals and personal circumstances. Diversification helps mitigate (but not eliminate) volatility and includes multiple asset classes across a variety of geographic and economic sectors. Such a portfolio is constructed with the knowledge that uncertainty and volatility are inevitable and a disciplined approach is the best option to provide resiliency.
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