It’s been an odd week.
On May 6, 2019, the Dow Jones Industrial Average (DJIA) plunged 400 points after President Trump threatened to escalate the trade war between the U.S. and China. In fact, he tweeted that he’d raise tariffs to 25% from 10% because talks were moving too slowly.
By May 8, 2019, the Dow Jones moved 100 points higher after a Chinese delegation informed the White House that it would still be coming to the U.S. to make a deal.
Today, the Dow Jones is plunging 350 points after President Trump said that China “broke the deal,” fueling fears that the U.S. and China will be unable to reach an agreement before the 25% tariffs take effect at 12:01 a.m. Friday.
"By the way, you see the tariffs we're doing? Because they broke the deal. They broke the deal," Trump said, as quoted by CNBC. "So, they're flying in, the vice premier tomorrow is flying in — good man — but they broke the deal. They can't do that, so they'll be paying."
While China has appealed to the U.S. to meet it halfway to save a potential trade deal, they’ve also threatened to retaliate if the tariffs go into effect. "The escalation of trade friction is not in the interests of the people of the two countries and the people of the world," the Chinese Commerce Ministry said, as quote by CNN.
Goldman Sachs: The Stocks to Buy if Trade War Erupts
According to Goldman Sachs, investors should target services firms, which they believe are less exposed to trade policy and could help insulate from trade-based volatility.
The firm notes that “Services stocks have less foreign input costs that might be subject to tariffs and are also less exposed to potential trade retaliation given they have less non-US sales exposure than Goods companies. Services stocks have faster sales and earnings growth, more stable gross margins, and stronger balance sheets. The relative valuation of Services vs. Goods is slightly elevated versus history,” as reported by MarketWatch.
Some of those companies include Facebook (FB), JPMorgan Chase (JPM), Visa Inc. (V), Cisco Systems (CSCO), Home Depot (HD), AT&T (T), Wells Fargo & Co. (WFC), Netflix (NFLX), and McDonald’s (MCD).
However, we don’t believe any stock will be safe from the initial shock.
The very best way to trade likely volatility is by trading VIX-related stocks and ETFs, such as the Velocity Shares Daily 2x VIX Short-Term ETN (NASDAQ:TVIX) tracks an index of futures contracts on the S&P 500 VIX Short-Term Futures Index. With market volatility ticking higher, and markets turning lower at resistance on trade war fears, one of the best ways to hedge for downside is with a stock that tracks the volatility index, such as the TVIX.