By Paul R. La Monica

Tariff threats spook Wall Street when the threat becomes reality. And they're about to become very real.

The proof is how the stock market sank after President Donald Trump fired the first shot in a trade war with Canada, Mexico, and China over the weekend.

Yes, the indexes clawed back a little bit of their losses Monday after Washington gave Mexico a monthlong reprieve, but everyday investors want a safer, more predictable place to put their money.

Short term, that haven isn't the market. The spots to hide right now are few and far between. Depending on how long the trade tension lasts, corporate profits could take a big hit -- making stocks riskier. Earnings for the S&P 500 could drop as much as 8%, Bank of America strategists estimate.

Even the hypothesis that smaller domestically focused companies will benefit from Trump's protectionism looks seriously misguided. The Russell 2000 and S&P 600, two indexes of small-cap stocks, stumbled even harder than the broader market.

And the market's big swings aren't going away any time soon because Wall Street isn't really sure whether the tariffs are policy or negotiation tactic. To that end, the Cboe Volatility Index, or VIX, soared 11% on Monday to above 18.

Two examples of where arm-twisting worked are trading partners to the south. Colombia sidestepped a 25% tariff after it settled an immigration spat with Trump and Mexico got its reprieve by stepping up to his demand for more help fighting the drug war. Next could be the U.K., and the 26 other countries in the European Union.

"The primary market uptrend remains intact, but the latest tariff developments underscore the potential for disruptions and broken pieces...," wrote Michael Skordeles and Keith Lerner, both of Truist. Skordeles is head of U.S. economics and Lerner is chief market strategist/co-chief investment officer.

So what's key on this roller-coaster ride is putting money in stocks that can weather the ups and downs. Big dividend payers are a prime example. Procter & Gamble, with a 2.4% dividend yield, was one of the Dow's top gainers on Monday. UnitedHealth, Verizon, Merck and IBM, which also have healthy payouts, were also in green.

Investors have the playbook from Trump's first presidency to see that income stocks are a good way to manage volatility, Julie Biel of Kayne Anderson Rudnick told Barron's.

"The last time around we managed through tariffs. But it was pretty messy and there was a lot of uncertainty," said Biel, chief market strategist and portfolio manager.

Mike Morey, chief investment officer of Integrity Viking Funds, also likes dividend payers but doesn't think investors don't need to limit themselves to stodgier defensive names.

Broadcom is the top holdings in the Integrity Dividend Harvest Fund that Morey manages. The fund also owns Corning. But it also has exposure to energy and utility stocks such as TC Energy and NextEra Energy as well as big banks such as Citigroup and JPMorgan Chase.

"We try to keep volatility on the low side and are focusing on companies that not just pay a dividend but also plan to raise it," he said, adding that there are plenty of attractive opportunities since "dividend payers have been left in the dust with all the sexy news about artificial intelligence."

Investors also should consider long-term bond yields, which fall as prices rise. Yields dipped Monday, a possible sign that investors are flocking to U.S. Treasuries as they often do during market tumult.

Gold, which unlike Bitcoin has stood the test of time as a true hedge against volatility, was up nearly 1%, too. It hit a record high -- just over $2,800 an ounce.

The U.S. dollar could keep rallying as well as investors seek safety, said Macquarie's Thierry Wizman on Monday.

The greenback "will attract inflows as a haven currency during the period of doubt," wrote Wizman, global FX and rates strategist, adding that "so long as tariffs stick...risk markets will suffer because of the valid view that tariffs slow GDP growth, reduce operating margins, and cause cost inflation."

Still, the message that investors shouldn't overreact to the Trump tariffs came through loud and clear again and again. At the end of the day, negotiations are a page in the president's playbook -- and anything can change on a dime, just as it did with Mexico on Monday.

"It's hard to know what the final outcome will be," said Tony Roth, chief investment officer with Wilmington Trust. "Investors need to be patient and ride through some of this volatility."

To play it safe, Roth said he wouldn't be buying consumer staples or discretionary stocks. But he thinks energy, financials and healthcare stocks outside of the pharmaceutical industry are good defensive plays and that buying opportunities will be more likely because of more volatility.

Write to Paul R. La Monica at paul.lamonica@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

February 03, 2025 14:19 ET (19:19 GMT)

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