My good friend Tony really loves his baked beans and shared this with me:
“Imagine you're at the grocery store, and you see your favourite baked beans, usually priced at $1, now on sale for 90 cents. How do you feel? Excited, right? You might even buy a few extra cans. This simple scenario can teach us a lot about consumer behaviour and its impact on financial markets today”, I especially think so in the context of President Trump's tariffs.
The Psychology of Price Drops
When prices drop, consumers often feel a sense of urgency and excitement. This is driven by the perception of getting more value for their money. In the case of baked beans, a 10% price reduction might seem small, but it can significantly influence purchasing decisions. This behaviour is rooted in basic economic principles: when the price of a good decreases, the quantity demanded typically increases.
Applying This to Financial Markets
Now, let's translate this to the financial markets. When stock prices drop, similar psychological effects come into play. Investors might see lower prices as an opportunity to buy more shares, believing they are getting a bargain. This can lead to increased trading volumes and market volatility.
The Impact of President Trump's Tariffs
Trump's recent tariffs have had a significant impact on financial markets. The tariffs, which include a baseline 10% tax on all U.S. imports and additional "reciprocal" tariffs on imports from 90 countries, have led to a sharp decline in stock prices. This has created a sense of uncertainty and fear among investors, similar to how a sudden price increase in baked beans might deter you from buying them.
Several factors are contributing to this market reaction:
Increased Costs
The tariffs have raised the cost of imported goods, leading to higher prices for consumers and businesses. This can reduce spending and investment, slowing economic growth.
Global Trade Tensions
The tariffs have sparked retaliatory measures from other countries, leading to a potential trade war. This has further increased market volatility and uncertainty.
Investor Sentiment
Just as a price drop in baked beans can lead to increased purchases, a drop in stock prices can lead to panic selling. Investors may fear further declines and rush to sell their holdings, exacerbating market downturns. Tip: We don’t want to be those people. It’s important to understand that these are paper losses which we do not have to realise.
Opportunities for Investors
Despite the challenges, declining equities can present unique opportunities for savvy investors:
Buying the Dip
Lower stock prices can be an attractive entry point for long-term investors. By purchasing undervalued stocks during market downturns, investors can potentially benefit from future price recoveries, when those baked beans are not on sale!
Sector Rotation
Investors might consider reallocating funds into sectors less affected by tariffs or those that could benefit from protective measures. For example, domestic companies that compete with foreign imports might see increased demand. What sort of baked beans should I be switching to, if at all?
Diversification
Adding a mix of dividend-paying stocks, international equities, and defensive assets like bonds can help manage risk and provide stability during volatile periods.
Understanding the psychology behind price changes and consumer behaviour can provide valuable insights into financial market trends. Trump's tariffs have created a complex environment where increased costs and global trade tensions are driving market volatility. However, these conditions also offer opportunities for investors to strategically position their portfolios for potential gains. By staying informed and adaptable, we can navigate these changes and make smarter financial decisions.
You don’t have to do this alone. Navigating the complexities of financial markets, especially in the context of Trump's tariffs and their impact on equities, can be challenging. This is where an authorised fiduciary financial adviser can be invaluable.
Fiduciary advisers are legally and ethically bound to act in your best interests, providing unbiased advice tailored to your unique financial situation. They can help you identify opportunities, such as buying undervalued stocks during market downturns, and develop a diversified investment strategy to manage risk.
By working with a fiduciary, you gain a trusted partner dedicated to helping you achieve your financial goals, ensuring that your investment decisions are well-informed and aligned with your long-term objectives.
Bruce Jenks is a financial adviser at Stewart Group, a Hawke’s Bay and Wellington-based CEFEX & BCorp certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, wealth management, risk insurance and KiwiSaver scheme solutions. Blog No 16.
The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from a Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz
