President Donald Trump finally set in motion tariffs on as much as up to $60 billion in Chinese imports on Thursday. Consequently, China too has announced plans for reciprocal tariffs on $3 billion of imports from the United States, giving rise to fears of an ensuing trade war. This saw the Dow once again tumbling more than 700 points or almost 3% on Thursday.
Going by the 90-year S&P 500 history, March is considered as one of the best months for stocks. This too seems to have been proven wrong this time, as the markets failed to start the month on a high owing to Trump’s proposed imposition of 25% and 10% tariffs on imported steel and aluminum, respectively.
Evidence of the panic is the spiking of the market’s preferred fear gauge to its highest level since Feb 5. Given that these events could drastically dent investor confidence, picking low beta stocks looks like a smart option at this point. Beta measures the tendency of a stock’s returns to respond to market swings. Low correlation stocks provide protection during turbulent times as these are less prone to day-to-day fluctuations.
Volatility Index Spikes
After trade fears escalated, the CBOE Volatility Index, which gauges the level of fear gripping the market, skyrocketed 31% to hit 23.35, finally settling at 24.04 on Thursday. The VIX has more than doubled so far this year.
Current weakness in the technology sector as well as the selloff which ensued post-Trump’s levies on China pushed up VIX. This also marked the highest increase for VIX in a single session since Feb 5, when the fear-gauge doubled from its lowest-ever level.
U.S.-China Trade War to Follow?
Trade war fears showed up in late February and the markets have remained volatile in March. Early this month, Trump finally announced tariffs on imported steel and aluminum, which saw shares of major automakers and airline companies declining. Although Canada was Mexico, the largest exporters of steel to the United States were exempted, the move was tailored at targeting China.