The announcement of higher-than-anticipated tariffs during President Donald Trump’s self-proclaimed “Liberation Day” last week rattled markets, briefly pushing U.S. equities into a bear market — characterized by a decline of 20% or more — just months after major indexes reached record highs. Since the announcement on April 2, nearly every sector and industry has traded lower.
The "Tariff Policy Fallout: Defensive Sectors Leading the Charge" chart highlights the performance of the best- and worst-performing industry groups since the S&P 500 all-time high, reached on February 19. The automobile (auto) and semiconductor (semis) industries were each hit extremely hard, with autos losing nearly a third of their value and semis giving back nearly 30%. Both industries rely heavily on imported parts from trade partners that were significantly impacted by the recent round of tariffs, likely disrupting supply chains and pushing up costs.
Tariff Policy Fallout: Defensive Sectors Leading the Charge
Source: LPL Research, Bloomberg
Conversely, the food, beverage, and tobacco industries, as well as traditional telecommunications, managed to eke out gains, rising 1.7% and 0.6%, respectively. The goods and services these industries provide are considered essential, so demand should remain consistent despite the new tariff policy. Additionally, some of these industries are somewhat insulated from projected kinks in the global supply chain, as goods and services are typically produced domestically or in more tariff-friendly Mexico.
While it may be hard to envision any sector and / or industry prospering in this high-tariff regime (with the effective overall average tariff rate exceeding 20%), some sectors of the economy may be more resilient than others.
Potential Sector Winners in Downturn
Consumer Staples. In risk-off periods, consumer staples have typically outperformed sectors peers, as the goods sold — whether they be groceries, toiletries, or other household items — are essential regardless of what stage of the business cycle we’re in. Their consistent revenue streams and reliable dividends are attractive to investors looking for consistency. This defensiveness has generally offset trade risk for global food and beverage companies.
Health Care. The need for medical care, medications, and treatments remains constant, making this sector resilient in market contractions. Additionally, the diversification of this sector’s sub-industries, such as biotechnology, pharmaceuticals, and medical devices, provide further diversification benefits. Finally, in general, domestic, services-oriented businesses, such as managed care companies, have virtually no tariff risk.
Utilities. Providers of water, electricity, and gas are essential in all economic environments, making this industry’s recurring revenue stream attractive in an economic slowdown. Many utility companies also benefit from regulated pricing, allowing them to weather a multitude of market regimes. The sector is also nearly 100% domestic.
Real Estate. Properties are an essential utility for consumers and businesses, irrespective of the economic environment. While property values and disposable income may decline, demand for real estate is typically more resilient than most sectors, with the ability to generate consistent rental income. Additionally, real estate is more domestically focused, leaving it relatively less exposed to tariffs. Further, one of the stated goals of the Trump administration is to lower interest rates, making real estate relatively more attractive.
Potential Sector Losers in Downturn
Consumer Discretionary. Industries like retail, luxury goods, entertainment, and travel are typically negatively impacted in market downturns, as discretionary income and spending tend to dry up. These goods and services are not considered essential like their consumer staples peers. Apparel retailers import a lot from Asia. Automaker supply chains are highly integrated with Mexico and Canada and are facing industry-specific tariffs. Additionally, many companies in this sector lack pricing power, as goods and services are discretionary and therefore typically expendable in a weaker economy.
Technology. This sector tends to underperform in corrections and bear markets due to economic sensitivity, lofty valuations, and reliance on less-certain cash flows further out in the future. In market corrections, investors may rely more on stable income (in the form of a dividend or consistent revenue) more so than projected capital gains. Additionally, technology (tech) stocks, especially big tech names such as NVIDIA (NASDAQ:NVDA) and Apple (NASDAQ:AAPL), are more exposed to international markets and have very global, Asia-focused supply chains, leaving them especially vulnerable to high tariffs in China, India, and Vietnam.
Energy. Reduced demand and price volatility are common in this global sector during economic contractions, as consumers and businesses look to cut down on travel and energy usage. Energy companies are highly dependent on oil and natural gas prices, which typically decline in volatile markets when recession fears rise. Growth effects are likely to more than offset the impact of tariffs on prices.
Materials. Like energy, materials is a very global sector with cyclical characteristics. Materials companies face significant tariff risk from its chemicals segment and its very China-heavy supply chain (not to mention the revenue risk from China's retaliation). Gold prices may hold up well in a trade-driven market downturn that is likely to be accompanied by a weaker U.S. dollar, providing a potential partial offset to possible chemicals weakness.
Financial Services. As consumers focus on essential goods and services, banks typically experience lower demand for lending (credit cards, loans, mortgages, etc.) as the need for big-ticket items, such as a car or house declines. Policy uncertainty tends to reduce demand for business loans. Banks tend to tighten up their lending practices when markets are volatile and recession risks rise, dampening growth prospects. Additionally, industries like wealth and asset management, whose revenue streams are typically correlated with market performance, tend to fall.
Those Willing To Ride Out Volatility May Be Rewarded
As the market begins to recover with (hopefully) a less onerous tariff regime than what President Trump announced last week, the above “sector losers” will likely turn into “sector winners” as consumer and business confidence returns with a more positive policy landscape. Businesses will likely respond by ramping up U.S. production and investments in growth initiatives, further reinforcing the economic rebound. Tax cuts and deregulation will increasingly come into focus. Investors, encouraged by improving economic growth prospects and stabilizing corporate earnings, may become more willing to increase their appetite for risk, buying into potentially meaningfully discounted sectors.
Finally, the sectors with the greatest exposure to tariffs discussed above that have been hit hardest during this downdraft, should see the biggest improvements in their outlooks as negotiations progress. They are likely to lead the way back up again. We got a glimpse of that when technology and consumer discretionary bounced the most Monday morning on the fake news headline about a 90-day tariff reprieve. As such, LPL Research’s Strategic and Tactical Asset Allocation Committee (STAAC) remains positive on the consumer discretionary sector. At the same time, the path of negotiations is uncertain, so LPL Research continues to advise market weight (neutral) exposures to the most defensive sectors including consumer staples, healthcare, and utilities.
****
Disclaimer:
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.