MW U.S. stocks bounced back on tariff relief. How to protect your portfolio from more volatility.

By Isabel Wang

Investors got what they wanted on Wednesday - temporary tariff relief from the Trump administration that finally halted a two-day selloff that sent the stock market into a tailspin earlier this week.

However, so-called reciprocal tariffs on foreign imports from all major U.S. trading partners are still coming in April, leaving investors wondering how they should prepare for another round of tariff-induced volatility.

President Trump earlier this week imposed tariffs against three major trading partners - drawing immediate retaliation from Canada, China and Mexico, and sending shockwaves through Wall Street amid concerns that a potential full-blown trade war could trigger economic turmoil in the world's largest economy.

U.S. stocks recovered some ground on Wednesday after the White House said it will give a one-month exemption from tariffs for automobile imports from Canada and Mexico. The Dow Jones Industrial Average DJIA finished up around 485 points or 1.1%, after tumbling over 1,300 points in the previous two sessions, while the S&P 500 SPX gained 1.1% and the Nasdaq Composite COMP climbed 1.5%, according to FactSet data.

Time to buy defensive stocks?

Defensive stocks tend to perform better during broader stock-market downturns, with companies in the consumer-staples, healthcare and utilities sectors viewed as a safe haven that may help hedge portfolio risk.

But even defensive names fell victim to this week's broad-based selloff amid mounting growth concerns. The S&P 500's consumer-staples sector XX:SP500.30 has fallen 0.8% so far this week - after quietly emerging as one of the top-performing sectors on the index this year - while the utilities sector XX:SP500.55 has slumped 2.2% this week and the healthcare sector XX:SP500.35 is up a modest 0.4% in the same period, according to FactSet data.

"The stock-market rotation has been into defensive sectors, and they have outperformed so far this year - but if recession really becomes a higher probability, no equity is going to work," said Nanette Abuhoff Jacobson, global investment strategist at Hartford Funds.

Brad Roth, chief investment officer at Thor Financial Technologies, said it's common to see a broad-based selloff when worries about the threat of a recession rattle financial markets. But over the long term, defensive stocks should still outperform the broader S&P 500 index and other cyclical sectors in a recessionary environment, he added.

See: These stock-market sectors are dominating the S&P 500 so far this year as investors play defense

To be sure, investors started to shore up portfolios with defensive names at the beginning of 2025 amid heightened fears around a possible mix of resurgent inflation and stagnating economic growth. The Atlanta Fed's GDPNow model on Monday estimated that the U.S. economy will shrink at a 2.8% annualized rate in the first quarter of 2025 - just days after it indicated that gross domestic product was on pace to shrink by 1.5% for the January-through-March period. Payroll company ADP also said on Wednesday that private-sector employers created just 77,000 new jobs in February, in a sign the U.S. economy could be slowing.

"We've also seen utilities [and other defensive sectors] outperform over the last couple of weeks and months, which is, in our view, a clear indication that there could be some continued and persistent market downside in the future as people continue to fly into safer assets," Roth told MarketWatch via phone on Wednesday.

In Roth's view, investors could turn to quality stocks for shelter. "We're looking at more Dividend Aristocrat-type stocks XX:SP50DIV that are safer, steadier and more resilient with a yield," he said.

Strong inflows into 10-year Treasury note

Investors piled into U.S. government-debt markets earlier this week as rising tariff concerns sparked a flight to the relative safety of Treasurys. The 10-year Treasury note BX:TMUBMUSD10Y recorded around $18 billion in net inflows on Monday and Tuesday alone, according to data compiled by Thor Financial Technologies.

"Treasurys are your friend in big equity selloffs, but your real return on Treasurys and cash-like investments will be reduced if the Federal Reserve does start delivering more interest-rate cuts," Abuhoff Jacobson told MarketWatch on Tuesday. "They are just places investors want to be in for capital preservation" in times of heightened market volatility, she added.

Of course, gold is another prime example of a haven asset. The price of the precious metal often rises during economic turmoil, as investors flock to gold for its stability and inherent value. The most active gold futures contract (GC00) (GCJ25) has soared 2.7% so far this week, to settle at north of $2,926 per ounce on Wednesday afternoon.

Greenback is losing its safe-haven status

The U.S. dollar is one of the most widely traded safe-haven currencies, but its relative strength compared with major rivals has weakened in 2025 amid fears that Trump's tariffs may spark a trade war that undercuts the U.S. economic growth.

See: The U.S. dollar is sending an alarming signal to investors and consumers

The strength in the euro $(EURUSD.FOREX)$ helped to undercut the greenback. The value of the euro has surged nearly 4% so far this week, with EUR1 currently worth about $1.08 as of Wednesday afternoon, driven by proposed defense-spending increases on the continent and rising European bond yields - a key driver for currency movements.

The ICE U.S. Dollar Index DXY, a closely watched gauge of the greenback's value against some of its biggest rivals, has fallen 3.1% this week to trade at 104.29, its lowest level since November, according to FactSet data.

-Isabel Wang

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March 06, 2025 06:00 ET (11:00 GMT)

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