The trade war between the U.S. and China could realistically trigger a man-made recession, and the banks have clearly sold off over the “risk of rain” that appears to be increasing by the month as more pieces of economic data flow suggestive of peak economic growth.
There’s no question that the weakness we’ve recently seen across the board (potential peak in auto, smartphones, discretionary) appear to be the doing of the self-destructive trade war. Unlike most past recessions, however, there appears to be a lifeline. Should Donald Trump or Xi Jinping want to make a deal, the pains endured by investors over the past few months could be relieved in a very short period.
The moment a peaceful resolution is announced between Trump and Xi, expect a very sharp, potentially record-breaking rally. Nobody knows when the deal will hit us, but you’re probably not going to want to time the market in hopes of missing the drops and feasting on the upside. It’s just not possible, and by doing so, you could risk missing the boat, as all it takes is a few trading days before we’re back at the highs should the trade war come to a close.
So, as you’ve probably guessed, the biggest mistake you could make is converting your paper losses into actual losses by selling with the intention of jumping back in when the turbulent waters have a chance to calm.
Unfortunately, by waiting for volatility to dampen, you’re risking the loss of upside because the steepest of drops are usually followed by extremely steep bounces. Just look at the chart of Toronto-Dominion Bank (TSX:TD)(NYSE:TD) and how it fared when it came time to rebound.
Sure, TD Bank got walloped a good one in 2008 just like everything else, but on a total return basis, the stock was quick to return to glory, and those who held or nibbled away at shares at any point on the way down ended up doing really well by the time the volatility fell back to “normal” levels.
You see, despite the ugly chart, TD Bank killed it in 2018.
Management continues to experience solid growth while simultaneously remaining one of the most conservative banks in the space. TD Bank is well equipped to deal with crisis due to management’s excellent risk management abilities. As the markets flop, TD Bank gets dragged down despite any promising moves going on in the background (TD Bank recently launched its mobile assistant ‘TD Clari’ and nobody seemed to notice).
Once investors are feeling sanguine again, you can be sure that TD Bank will be among the first to storm out of the gate. In order to discourage short-term timing of the market, there’s a fat 4% dividend yield to collect as you hold the name that I believe deserves a permanent spot in your portfolio.
Stay invested. Don’t overestimate your abilities and try to outsmart the crowd because it’s not that simple, as you’ll find yourself following the herd without realizing it. TD Bank was quick to fall, but it was also quick to rebound. If you missed the biggest bounce-back days, you not only missed out on capital gains, you lost a rare opportunity to lock in a higher-than-average yield.
Stay hungry. Stay Foolish.
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Fool contributor Joey Frenette owns shares of TORONTO-DOMINION BANK.