How I'm Trading Amid Tariff Turmoil
As volatility jumps, I'm taking small steps -- and just made a starter position in this mega-cap tech company.
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Investors got another sign that the economy might be slipping further yesterday. The February consumer confidence reading posted its worst level since August of 2021 on Tuesday. The metric fell to just 98.3 in February This was significantly below the 103 consensus, and down sharply from the 105.3 data point in January.
In trading action, markets were also generally down. The Dow managed to rally nearly 160 points, but the Nasdaq fell by 1.35% and the S&P 500 lost nearly half of 1% on the day. The small cap Russell 2000 slipped .38%. Oil fell just over 2% on worries that the economy might be slowing, and importantly, the yield on the 10-Year Treasury pulled back 10 basis points to end the day at the 4.3% level.
Some of the consumer angst is over how potential tariffs could worsen inflation. Ten percent tariffs have been implemented against Chinese goods and 25% tariffs are set to go into effect next week, targeting Mexico and Canada, unless they are delayed once again. Longer term, reciprocal tariffs are on the table.
I can understand some of the justification for these aggressive trade policies. Canada and other NATO countries have not honored their NATO pledges to allocate at least 2% of GDP to defense for many years now. European tariffs on autos and auto parts are four times higher on U.S. imports than vice versa, a Cold War relic that should have been rectified shortly after the fall of the Berlin Wall. Mexico has allowed Chinese manufacturers to use its country to take unfair advantage of the trade treaty between it, the U.S. and Canada. Until recently, the nation did very little to stop the flow of illegal immigration across the southern border over the prior four years.
That said, tariffs are going to introduce a large measure of new volatility into the market. American multi-nationals, given how much of their revenues comes from overseas, could be particularly vulnerable. One can just imagine the impacts to the likes of Apple AAPL, if a full-blown trade war broke out between China and the United States. There was a recent analysis that postulated that the technology sector is the most vulnerable of the 11 sectors in the S&P to escalating trade tensions as technology gets just over 55% of its overall revenues outside the United States. The Utility Sector is the least impacted, with less than 3% of revenues being international. Healthcare is also relatively safe with just less than 15% of sales coming outside the United States.
I think this volatility is likely to persist in the coming months, barring any major breakthroughs on the trade front. As I have noted in my recent columns, I am just making incremental moves deploying some dry powder into the market during the recent decline. Yesterday, I initiated a starter position in Amazon AMZN, using covered-call orders with a strike price $10 below the current trading levels of stock. The shares have dropped nearly 15% from their highs earlier in February. The online juggernaut just surpassed Walmart WMT in quarterly sales for the first time to date. In addition, on a forward price-to-earnings basis, AMZN now has a lower valuation than Walmart, despite much superior revenue and earnings growth rates.
At the time of publication, Jensen was long AMZN.
