• Wealth Management

Trade, Tariffs and Your Portfolio

Growing trade protectionism is making some defensive strategies more appealing, including investing in the banking sector.

When public policy shifts, market dynamics often do as well. It can happen fast. In the past week, investors are worrying less about inflation and higher interest rates and more about escalating trade tensions following the Trump administration’s decision to impose aggressive new tariffs on steel and aluminum imports.

There is good reason to be anxious. A full-blown trade war (we’re not there yet), could alter sector leadership for stocks. Last week I wrote about how tech and consumer discretionary sectors were holding onto market leadership, despite rising interest rates (see, "For Now, It’s a Sideways Market”). But if a trade war breaks out, those sectors, which rely heavily on global trade for their supply chains, suffer.

To protect against a potential trade war, many investors are taking shelter in small-cap and domestically-focused stocks.

I have another suggestion: U.S. banks. Our research shows that commercial and investment banks have outperformed recently and I expect that to continue for three main reasons: Earnings growth is likely to be very strong, valuations are attractive and deregulation is likely.

A key backdrop is that banks are likely to benefit if interest rates continue to rise. There is the possibility that the Federal Reserve could raise rates this year as many as four times, taking the short-term federal funds rate above 2% for the first time in a decade.  Plus, the 10-year Treasury rate has moved up to close to 2.90%, and may keep rising if inflation picks up. A steeper yield curve would increase the potential profitability of loans, just as the appetite for commercial and industrial loans looks set to jump due to positive economic news, tax reform incentives and improving business sentiment. Based on consensus estimates, bank earnings could grow as much as 28% in 2018 and valuations currently appear quite reasonable by historical standards.

Bottom Line: With the first quarter of 2018 almost over, I think investors are just waking up to the implications of rising interest rates and higher inflation as stronger growth is turbo-charged by tax cuts and deficit spending. Banks are a classic reflation play and worth a closer look as trade tensions contribute to market anxiety.

Ready to invest in what matters to you?