On the last day of March in 2018, President Trump raised the issue that the United States Post Office was losing $1.50 on every package it delivered for Amazon. Two days later, he stated “our fully tax paying retailers are closing stores all over the country … not a level playing field.” The insinuation was that, one way or another, Amazon’s shipping costs were about to rise, cutting into profits. On the first day of trading following these comments, Amazon’s stock lost $30 billion in value, falling 5.2%.

Exactly two months later, on May 31, the U.S. imposed tariffs of 25% on steel imports from the European Union, Canada and Mexico. This act sent markets broadly lower, specifically hurting manufacturing companies such as Boeing and Caterpillar who rely on imported steel. Of course, the purpose of this tariff was to make domestic steel producers more competitive, and so companies such as U.S. Steel rallied on the news, ending the trading day up 1.7%.

When events like these occur, it may feel as though the future is going to be relatively clear and straightforward. The threat of rising costs should be a headwind for Amazon, and the protection of tariffs should be beneficial for US Steel. It seems logical then that profits can be made by adjusting a portfolio to account for this new competitive landscape. Of course, as we routinely discover, the future is entirely unpredictable. Since the March 31, 2018, comments made by President Trump, Amazon’s stock has delivered a 13% return for investors. Since the May 31st tariffs were imposed, U.S. Steel stock has fallen by 38%.1

As investors, it’s important to understand our desires to invest off of a narrative. We have a natural desire to understand the world and how current events will shape the future. However, time and time again we see that our expectations deviate significantly from reality. So, when constructing portfolios, we have two choices. We can ignore the evidence which shows us that investing off of headlines tends to lead to concentrated portfolios that contain more risk and tend to underperform, or we can choose to invest with the mindset that markets are highly competitive and efficient, and that low cost index investing will deliver the best results. We choose the latter because it gives our clients the greatest likelihood of successfully accomplishing their financial goals with the least risk.

  1. Data represents past performance. Past performance is no guarantee of future results. Source data is from Morningstar Direct for Amazon (AMZN) for the time period of March 29, 2018-February 11, 2019, and United States Steel Corporation (X) from May 31, 2018-February 11, 2019.

NOTE: The information provided in this article is intended for clients of Carlson Capital Management. We recommend that individuals consult with a professional adviser familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.