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U.S. Triggers Off Trade War: Best & Worst Investing Zones

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After months of rhetorical tariff threats between Washington and Beijing, the world’s two largest economies have declared a trade war. This is especially true as Trump’s 25% tariff on $34 billion in Chinese goods, including auto, electric cars, aerospace, communications tech, new materials and robotics became reality at 12:01 A.M. on Jul 6 and another $16 billion is expected to go into effect in two weeks.

China also hit back with the same scale and strength, slapping charges on American goods targeting heartland staples like soybeans, corn, pork and poultry. The United States has violated World Trade Organization rules and ignited the largest trade war in economic history,” China’s Commerce Ministry said in a statement. With retaliation from Beijing, Trump has issued warnings of additional tariffs on $500 billion in Chinese goods.

The latest move marked the escalation of the trade war from threat to reality and would result in a global recession. It would hurt global supply chains, increase costs for businesses and consumers and slow down investments. Canada, Mexico and Europe are also engaged in tit-for-tat tariff exchange with the United States. As a result, the ongoing development suggests that the worst, which could send shockwaves across stock markets, is yet to come.

Against such a backdrop, there are a few places where investors can stash their cash in the stock world and a few that should be avoided.

Best Zones

Gold


In difficult market environments, gold is considered a great store of value and hedge against market turmoil. Acting as a leveraged play on the underlying metal prices, metal miners tend to experience more gains than their bullion cousins in a rising metal market. Hence, mining stocks could outperform in the current trade turmoil. As such, Yamana Gold Inc. (AUY) seems a lucrative pick as it carries a Zacks Rank #2 (Buy) and a Momentum Score of A. The stock has risen 8.1% over the past month.

Consumer Staples

The consumer staples sector is defensive as it includes a variety of items like food & beverages, non-durable household goods, hypermarkets and consumer supercenters that are every-day essentials. These products see steady demand even during an economic downturn due to their low level of correlation with economic cycles. As such, these generally act as a safe haven amid political and economic turmoil. Stocks in these sectors generally outperform during periods of low growth and high uncertainty. Among these, B&G Foods Inc. (BGS) has gained 12% over the past one month. It carries a Zacks Rank #2 and a Momentum Score of B.

Small Caps

Small-cap stocks have been the winners amid trade and tariff threats, and are likely to continue their outperformance. This is because small-cap stocks have less international exposure and generate most of their revenues from the domestic market. These pint-sized stocks are less vulnerable to a trade war or any other political issue and could better insulate investors from Trump’s protectionist stance. Rent-A-Center Inc. (RCII) having a Zacks Rank #2 and a VGM Score of A is among the biggest gainers in a month’s time, rising 42.5%.  

High Dividend

The dividend-paying securities are the major sources of consistent income for investors when returns from the equity market are at risk. These stocks offer the safety in the form of payouts and stability in the form of mature companies that are less volatile to the large swings in stock prices. The companies that offer dividends generally act as a hedge against economic uncertainty and provide downside protection by offering outsized payouts or sizable yields on a regular basis. While there are several top-ranked options available in the space, Arbor Realty Trust (ABR - Free Report) looks impressive given its Zacks Rank #1 (Strong Buy) and one-month return of 13.5%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Worst Zones

Farm Belt


U.S. farmers and food producers are in the crosshairs of a global trade conflict. Tariffs were already imposed by Canada on beef and by Mexico on pork and ham imports. Another round of tariff from China on soybeans and pork also come into effect in response to Trump’s latest tariff implementation. Soybean exporters like Archer Daniels Midland Company (ADM - Free Report) and meat producers like Tyson Foods Inc. (TSN - Free Report) and Hormel Foods Corporation (HRL - Free Report) would be hit. ADM has a Zacks Rank #2 and added 3.6% in a month while the other two has a Zacks Rank #3 (Hold). TSN is down 2.3% and HRL is up 1.7%.

Auto

The potential tariffs on cars and auto components are the greatest threats to the auto industry. Global Automakers President and CEO John Bozzella warned “tariff hikes would raise prices, make it more expensive to produce cars and trucks in the United States. He said the tariffs could cause a slowdown in sales and production, which would not be good for either American consumers or autoworkers.” BorgWarner Inc. (BWA - Free Report) shed 13.9% in a month and has a Zacks Rank #3.

Semiconductors

Trump’s import tariff on Chinese products will compel American semiconductor companies to pay duties on their own products. This is because chips are manufactured in the United States but are shipped to the Asian nation for assembly, testing and packaging due to its favorable labor costs, according to the Semiconductor Industry Association. Some of the worst-hit chip stocks include Intel (INTC - Free Report) , Micron (MU - Free Report) and Texas Instruments (TXN - Free Report) . INTC, MU and TXN were down 12.9%, 12.9% and 5.9%, respectively. However, these stocks have a favorable Zacks rank.

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