Tariffs Shake Up the Stock Market: Strategies for Investors
The recent escalation of trade disputes has sent shockwaves throughout the U.S. stock market, nudging equities closer to correction territory. This past week, the S&P 500 experienced a notable decline of 6% from its mid-February peak, wiping out its gains since the last presidential election. Meanwhile, the tech-heavy Nasdaq Composite has fallen by 8% from its recent high. The tumultuous atmosphere can be traced back to President Donald Trump’s campaign promises to raise tariffs on key trade partners, aiming not only for political victories but also increased government revenue.
Economists and strategists have largely echoed concerns regarding the risks associated with a tariff-heavy trade policy. Many worry that such a strategy could lead to trade wars, potentially stifling economic growth and escalating inflation. Veteran strategist David Kelly from JPMorgan Asset Management has passionately argued against tariffs, stating that they “raise prices, slow economic growth, cut profits, increase unemployment, worsen inequality, diminish productivity and increase global tensions.” His colorful commentary underscores the gravity of the situation, adding, “Other than that, they’re fine.”
Despite these warnings, some market participants remain unperturbed, believing Trump may be bluffing or that agreements will be reached with allies. Others consider the potential economic impact of trade wars to be negligible. Brian Mulberry, a portfolio manager at Zacks Investment Management, acknowledged the seriousness of the situation but suggested that the market’s response might have been exaggerated. “The reaction of the market is a little bit overdone,” he stated.
As the prospect of ongoing tariffs looms, investors are left grappling with how to navigate this new and unpredictable landscape. Callie Cox, chief market strategist at Ritholtz Wealth Management, remarked, “Tariffs of this size and magnitude haven’t happened in about 100 years. We’re working with a pretty unprecedented change in policy here.” However, amidst the uncertainty, top strategists are offering suggestions for where to invest during this tariff-driven sell-off.
Defensive Sectors: A Safe Harbor
Strategists emphasize the importance of adopting a risk-off approach by focusing on defensive sectors like healthcare and consumer staples. According to Cox, “This is the time to play defense and to really protect yourself.” These sectors have shown resilient performance, as demand for essential goods such as medications and groceries tends to remain steady, even during economic downturns or heightened trade tensions.
Investor Grant Stark highlighted the long-term growth prospects of healthcare, pointing out that the aging American population will drive demand for advanced medicines and skilled healthcare. He specifically named pharmaceutical giants Merck and Gilead, along with pharmacy retailer CVS Health, as attractive investment opportunities. Mulberry echoed this sentiment and suggested avoiding companies heavily reliant on offshore manufacturing for pharmaceuticals.
Greg Halter, director of research at Carnegie Investment Counsel, noted biopharma company Amgen and medical device maker Stryker as preferable investments, citing Stryker’s impressive fundamentals, including a robust balance sheet and strong cash flow.
Financials: An Attractive Sector Amidst the Turmoil
While the U.S. economy shows signs of slowing down, financial stocks are not being overlooked. With expectations that deregulation under Trump could spur more deal-making activity, some strategists are optimistic about the financial sector’s prospects. Notably, financials remain largely insulated from direct tariff impacts, allowing them to navigate the uncertain economic waters more freely.
Halter pointed out insurance giant Progressive as an exemplary financial stock, commending its nimbleness in adjusting advertising expenditures based on market conditions. In a downturn, Progressive could reduce its promotional efforts, proving that adaptability is key during volatile periods.
Quality and Real Assets Take Center Stage
Amid the tariff chaos, focusing on quality stocks across various sectors is prudent, according to Gabriela Santos of JPMorgan Asset Management. She emphasized prioritizing companies with strong balance sheets and consistent earnings potential, particularly large and mid-sized companies that are better positioned to withstand economic fluctuations. Santos noted that the more uncertain economic environment could heighten interest in tangible assets such as gold, offering a hedge against inflationary pressures that tariffs may exacerbate.
Considering Fixed Income for Portfolio Diversification
In light of market volatility, increasing exposure to high-quality fixed income assets is becoming an attractive strategy for investors. With bond yields remaining elevated compared to pre-pandemic levels, many analysts view bonds as a robust means to mitigate risks associated with trade-induced economic slowdowns. Stucky underscored the value of bonds for protection against waning growth, while Cox expressed interest in Treasury Inflation-Protected Securities (TIPS) as a precaution against potential inflation spikes resulting from tariffs.
Conclusion
As tariffs rattle markets and investor sentiment hangs in the balance, careful portfolio management and strategic sector allocation can provide opportunities to weather the impending storm. By diversifying investments, prioritizing defensive positions, and managing exposure to fixed income, investors can navigate the uncertain landscape with greater confidence.