Stocks are deep in the red today, April 3, after President Donald Trump announced sweeping tariffs on U.S. trading partners late Wednesday. At last check, futures on the three main indexes were down at least 3% across the board.
“Both the magnitude of ‘reciprocal’ tariffs imposed per country and the set of countries they were imposed on were larger than many had reasonably anticipated,” notes UBS Global Research strategist Bhanu Baweja.
The fact that they come on top of 10% universal tariffs “is an added shock,” Baweja says. This, he believes, has the potential to “considerably worsen” both domestic and global economic growth in the year ahead.
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The UBS economic team feels “it’s plausible” that real gross domestic product (GDP) “could be compromised by 1.5 to 2 percentage points” and that inflation could near 5% if these tariffs are not reversed soon, Baweja adds.
Wedbush analyst Daniel Ives says that President Trump’s “jaw-dropping reciprocal tariff chart … will be shown in classrooms and be written about for years” because it is “so illogical and absurd.”
Ives adds that we have to assume these tariffs are just “the start of a negotiation” or else the U.S. just sparked “a self-inflicted Economic Armageddon that Trump would send the U.S. and world through over the coming year.”
The high-flying mega cap stocks that have led the rally in recent years are poised to extend the losses they’ve incurred this week.
At last check, Apple (AAPL), Amazon.com (AMZN), Tesla (TSLA) and Nvidia (NVDA) were all set to open sharply lower Thursday.
What can investors do?
There’s a saying on Wall Street that stocks are the only thing people don’t want to buy when they’re on sale. Thus, there is only one rule to follow when stocks are selling off sharply: don’t panic. Investing in the market is a marathon and not a sprint.
As we’ve said time and time again, wealth is built over decades, not days. As just one example, those who invested $1,000 in Nvidia 20 years ago would be sitting on tremendous returns today. And even though NVDA shares are down nearly 20% for the year to date, the chipmaker has averaged an annual return of almost 80% over the past five years.
Remember that the idea is to buy low. Stocks are cheaper today than they were yesterday. They may get cheaper tomorrow, but the long-term trend has always been up and to the right. That’s why dollar-cost averaging works.
More importantly, market corrections are normal. “While uncertainty and volatility will continue in the near term, this isn’t a market falling apart; it’s a market fighting through uncertainty,” says Mark Hackett, chief market strategist at Nationwide.
“For long-term investors, this is part of a bottoming process and a buying opportunity, with markets likely to be meaningfully higher over the next 12 months – it just might be a fistfight to get there,” Hackett adds.
Be that as it may, it’s abundantly understandable if investors want to de-risk their portfolios to some degree – as long as they understand that they will also forgo some upside once the market regains its footing.
One way to protect portfolios against market volatility is to hedge with options – particularly put options – which can create a buffer against potential downside. But buyer beware. With the Cboe Volatility Index (VIX) spiking, the cost to buy short-term options insurance is fairly high at the moment.
As for equities, investors can seek out traditional safety plays. These can include the best dividend stocks, which “tend to hold up better in market drawdowns,” writes Dan Burrows, senior investing writer at Kiplinger.com.
Additionally, investors can seek out low-volatility stocks that “can not only help reduce losses in a downturn,” writes Kiplinger contributor Kyle Woodley, but they can also prevent “you from panic selling.”
To spread risk out over a basket of stocks vs individual equities, investors can also seek out the best dividend growth ETFs or low-volatility ETFs.