Finding Safe Haven Stocks Amid Trump’s Tariff Tantrum

Investors Breathe a Sigh of Relief as Tariffs on Mexico and Canada Are Paused, But China Tariffs Move Forward

The financial markets closed on Monday with a sense of cautious optimism after President Donald Trump announced a 30-day pause on tariffs for imports from Mexico and Canada. This decision came after both countries agreed to strengthen border security in response to Trump’s demands. The initial announcement of 25% tariffs on goods from these nations had sent shockwaves through the markets, with the S&P 500 dropping 2% at the start of the day. However, by the end of Monday, the index had recovered most of its losses, finishing down just 0.8%, and erased the remaining losses in after-hours trading when Canada announced its border security plan.

The temporary reprieve for Mexico and Canada is a welcome relief for investors, but the broader concerns about trade tensions remain. Trump’s tariffs on Chinese imports went into effect on Tuesday, with a 10% levy on Chinese goods, signaling that the administration is continuing its aggressive stance on trade. While the immediate threat of tariffs on Mexico and Canada has been delayed, the broader implications of Trump’s negotiating tactics are a reminder that this could be a prolonged period of uncertainty for global trade.

The Larger Picture: Trump’s Use of Tariffs as a Negotiating Tool

The agreement with Mexico and Canada underscores Trump’s reliance on tariffs as a powerful negotiating tool. By threatening tariffs, the administration was able to extract concessions from both countries, including Mexico’s deployment of 10,000 troops to its southern border to curb illegal immigration and the flow of fentanyl into the U.S. This approach has emboldened Trump to use tariffs as leverage in other trade negotiations, with the European Union likely to be the next target.

Adrian Helfert, CIO of alternative and multi-asset portfolios at Westwood, a Dallas-based firm managing $17.7 billion, notes that Trump’s success in extracting concessions from Mexico and Canada has reinforced the administrations belief in tariffs as an effective negotiating strategy. “What’s happened with Colombia and Canada and Mexico primarily have reinforced to President Trump that this is an effective negotiating tool,” Helfert says. “None of us should be surprised.”

The temporary pause on tariffs for Mexico and Canada is likely to be seen as a victory for the administration, but it also suggests that Trump may continue to use the threat of tariffs as a way to extract concessions from trading partners. This has significant implications for investors, who will need to navigate a complex and unpredictable trade environment.

Investment Strategies: Preparing for a Prolonged Trade Dispute

Given the uncertainty surrounding tariffs and trade negotiations, investors are looking for ways to protect their portfolios while still positioning themselves for growth. One key strategy is to focus on small and mid-sized businesses that have a domestic focus. These companies are less exposed to the risks of global trade disruptions, as they rely less on international supply chains.

Helfert recommends looking for opportunities in small and mid-sized domestic businesses, which are currently undervalued relative to large caps. He points to sectors such as U.S. defense stocks, which are likely to be spared from Trump’s threatened cuts to the federal budget. Companies like Kratos (KTOS), which specializes in military electronics and drones, are well-positioned to benefit from increased defense spending.

Another area of opportunity is regional banks, such as Cullen/Frost Bankers (CFR), which are less exposed to international trade tensions. These banks are poised to benefit from decreased regulatory costs and increased M&A activity, making them attractive investments in a trade-dispute environment.

Sector Highlights: Momentum Opportunities in Key Areas

While some sectors are more vulnerable to the impacts of trade disputes, others are likely to benefit from the momentum created by the current economic environment. Sam Stovall, chief investment strategist at CFRA Research, points to sectors such as communication services, financials, healthcare, and materials as areas where investors can find opportunities.

The “January barometer,” which suggests that stocks tend to perform well throughout the year if they rise in January, provides reason for optimism. The S&P 500 gained 2.7% in January, suggesting that the market could be on track for a strong performance in 2025. Stovall believes that even in the face of trade disputes, there are sectors that will continue to see growth.

One such sector is communication services, where companies like O’Reilly Automotive (ORLY) have shown resilience despite having facilities in Mexico and Canada. Pharmaceutical firms like Boston Scientific (BSX) and Quest Diagnostics (DGX) are also well-positioned, as their focus on domestic operations makes them less vulnerable to trade disruptions. Additionally, industrial-focused real estate investment trusts like Prologis (PLD) are likely to benefit from a prolonged trade dispute, as they focus on domestic logistics and distribution.

The Automotive Industry: Navigating the Risks and Potential Opportunities

The automotive industry was among the most affected by the initial announcement of tariffs on Mexico and Canada, with the S&P 500 dropping 2% at the start of the day. However, the pause on tariffs has provided some relief, and the industry is now assessing the potential long-term impacts of the administration’s trade policies.

David Whiston, an equities strategist at Morningstar covering the automotive industry, notes that the automotive sector is highly integrated across North America, making it particularly vulnerable to tariffs. However, not all automotive companies are equally exposed. Gentex Corp. (GNTX), which manufactures automatic dimming rearview mirrors and other electronic equipment for cars, dropped 2.9% on Monday but is less reliant on imports from Mexico and Canada compared to many of its peers. While the company is still at risk of overall demand for cars dropping if prices rise, its more limited exposure to foreign supply chains makes it a relatively safer bet in the automotive sector.

The broader impact of tariffs on the automotive industry could also create opportunities for U.S.-based manufacturers, as the administration’s policies aim to encourage companies to bring more manufacturing back to the U.S. This could benefit smaller companies that already have a domestic focus, as they are better positioned to weather the storm of trade disputes.

Conclusion: Navigating the Uncertain Landscape

The pause on tariffs for Mexico and Canada is a welcome respite for investors, but the broader trade tensions with China and the European Union signal that this is a more than a temporary issue. As Trump continues to use tariffs as a negotiating tool, investors need to be prepared for a prolonged period of uncertainty.

There are, however, opportunities for growth in this environment. Small and mid-sized domestic businesses, defense stocks, regional banks, and sectors such as communication services, financials, healthcare, and materials are all areas where investors can shelter from the risks of trade disputes. Additionally, the focus on bringing manufacturing back to the U.S. could create long-term benefits for smaller companies with a domestic focus.

For investors who prefer the stability of passive index funds, options like the Vanguard Small-Cap Value Index Fund ETF (VBR) could provide a safer haven in uncertain times. While the short-term volatility of the markets may be unsettling, the long-term outlook for the U.S. economy remains positive, and investors who are able to navigate the risks of the current trade environment could be well-positioned for future growth.

In conclusion, the pause on tariffs for Mexico and Canada provides a temporary reprieve, but the broader trade tensions are a reminder that investors must remain vigilant and proactive in managing their portfolios. By focusing on domestic opportunities and sectors less exposed to global trade disruptions, investors can navigate this uncertain landscape and position themselves for long-term success.