Investors are looking at ways to ward off economic pain now tariffs are here, seeking assets that can ride out a recession and higher inflation or companies that rely less on international trade.
The S&P 500 has lost 7.7% since its post-inauguration peak hit on February 19 and could see more volatility, investors say, after Trump tariffs came in heavier than many on Wall Street thought.
Fresh uncertainty about just how far tariffs will eventually go is causing a hunt for protection and trades which offer a buffer.
"We have no idea where we're going to land, where we're going to be over the next three and a half years, with respect to tariffs," said Don Calcagni, chief investment officer at Mercer Advisors, who recommends private markets which avoid headline risk. "And so, for that reason, we think it's a market where investors should just remain cautious, stay very well diversified, and resist trying to be the hero."
Trades that could protect against the impact of tariffs include commodities, precious metals such as gold, value and defensive stocks as well as smaller companies and bonds.
"The moves that we've seen in markets so far are a function of flight to safety for the tariff-imposed risk or potential recession. Now we need to think beyond that," said Gustaf Little, a senior portfolio manager at Allspring. "There could be potential for an era of de-globalization from tariffs," he said.
Allspring's Little is on the hunt for small-cap firms that could benefit from protectionist policies, as they depend less on trade than large caps. He has added some positions like this in recent weeks.
Robert Christian, head of Absolute Return at Franklin Templeton said that as a hedge fund investor, he favors either global macro, which can trade a myriad of assets in different countries, or neutral equity funds, which tend to perform well amid uncertainty.
"Companies loaded up their warehouses and are prepped ... for the next three or four months. But the question is: what happens after that?" said Christian.
MORE DOWNSIDE?
There could be more pain, even with the S&P 500 in correction territory.
"Eye-watering tariffs on a country-by-country basis scream 'negotiation tactic,' which will keep markets on edge for the foreseeable future," said Adam Hetts, global head of multi-asset at Janus Henderson Investors in a commentary.
Hetts said the Trump administration had demonstrated surprisingly resilience to market pain.
"Now the big question is how much tolerance it has for true economic pain as negotiations unfold," he said.
The S&P 500 currently trades at about 20.4 times earnings estimates for the next 12 months, well above the long-term average P/E ratio of 15.8, according to LSEG data.
The main concern for investors is whether protectionist trade policies will erode business and consumer confidence, heighten inflation and tip the U.S. into a recession or even stagflation, a mix of sluggish growth and high inflation.
Michael Medeiros, macro strategist at Wellington Management, said companies that don't know what type of cost pressures to expect will find it difficult to make spending and hiring decisions in the short and medium terms.
"That's where the corrosive impact of uncertainty can really start to have a negative feedback loop into the economy," Medeiros said.
Ahead of the tariff announcement, recession expectations were rising. This week Goldman Sachs raised the probability of a U.S. recession over the next 12 months to 35% from 20%.
Medeiros, who drafts investment ideas for Wellington, said real assets, such as precious metals, could fence off portfolios from a potential recessionary side effect of tariffs, as well as inflation.
Damian McIntyre, portfolio manager at Federated Hermes, meanwhile, has been overweight large value and he would look at defensive dividend companies in an economic downturn.
Chris DeCarolis, senior portfolio manager at Wealth Enhancement, said utility companies are also top of mind.
"People are still going to pay waste management companies to pick up their garbage, or their cell phone bills," he said.
SECOND-TIER IMPACT
Investors are also concerned about the knock-on effects around the world and how tariffs will change demand for U.S. goods in other markets.
"These tariffs will surely push consumers in China and other countries to consume more of their own products or other brands," said Eric Clark, chief investment officer at Alpha Brands Portfolio Manager, adding that S&P 500 companies generate more than 40% of revenues outside of the U.S.
That could alter the "U.S. exceptionalism" narrative, which saw money pour into assets on the expectation that the country would outperform.
"Now the question is whether U.S. exceptionalism is about to change and if so, where that leadership will migrate to," said Olga Bitel, global strategist at William Blair & Co.
Some, however, see a silver lining.
"I think the market will settle down and begin to parse the details and realize it's at worst a mixed bag of news," said Jason Britton, chief investment officer at Reflection Asset Management, adding he was attracted to big technology companies that have enormous cash piles.
"If they're going to get pinched by this retreat, I'm a buyer on weakness," said Britton. "It's just the market over-reacting, and I'm very happy to take advantage of that."
