Trade War Volatility Drives 25% Gold Gain, 74% Bitcoin Surge

Earlier this year, the trade war significantly impacted investors’ portfolios, particularly in early April when volatility surged and the S&P 500 approached a bear market. However, by the end of the second quarter, the index had recovered to new all-time highs. The heavy volatility sent shockwaves through the stock market, leading investors to express their concerns about the US's approach to global trade policy and its impact on markets.

While the immediate answer to whether the trade war volatility was beneficial is a resounding “no,” especially if it were to drive inflation higher and push the global economy into a recession, there is a perspective worth exploring. This perspective considers whether such events could be advantageous for everyday investors. Volatility creates challenging investing environments, even for those who make routine, automated purchases in index funds. The traditional investor in US stocks and bonds faced a difficult start to the year, as bonds did little to mitigate the impact. However, those who remained invested were ultimately rewarded. The S&P 500's annual returns since 1942 illustrate that long-term returns favor time in the market, and leaning into volatility is often a better strategy than panicking from it.

Volatility is a measure of emotion, and while it brings fear and anxiety, retail investors are learning that sometimes they need to close their eyes, buy, and hold. The rebound from volatility can vary in duration, but ultimately, embracing volatility can lead to stronger portfolios. As of the end of the second quarter, portfolios likely looked much stronger than they did at the end of the first quarter. This is evident in the performance of various assets, with gold prices up almost 25% this year and 40% over the past 12 months, Bitcoin up 14% and 74% in the same stretch, and European equities performing well, with the German DAX up 20% and the UK’s FTSE up 7.5%. Chinese stocks, like the FXI ETF, have also seen significant gains this year. This highlights the importance of diversification in steadying the ship during volatility spikes.

Gold, for instance, is considered a “safe haven” asset and has outperformed the S&P 500 in three of the last five years and in four of the last seven years. Short of a massive second-half reversal, it is likely to outperform US stocks again in 2025. The trade war is not beneficial for the global or US economy, making life more difficult for businesses and consumers. While investors would have preferred a scenario with steady gains, bursts of volatility do provide opportunities for patient, long-term oriented investors. As noted by Morgan Housel, volatility is the fee we pay for enjoying longer-term returns, and this advice has continued to ring true.