Stocks were tumbling Monday after China retaliated in its trade war with the U.S. by increasing tariffs on $60 billion of U.S.-made goods. From the looks of things Monday, Wall Street is suggesting investors may want to stay away from equities exposed to the trade war.
The Dow Jones Industrial Average has declined 4.7% since May 3, and the S&P 500 has dropped 4.85% since then, after Donald Trump that weekend threatened to levy tariffs on $200 billion of goods imported from China.
Not only do U.S. tariffs on Chinese goods threaten to put a dent in domestic demand, but Chinese retaliatory tariffs on American goods threaten to weaken Chinese end-markets for American companies. Plus, some on Wall Street have said the risk of a lasting trade war is rising.
"Our base case remains that a deal will be struck that eventually results in a staggered off-ramp for the tariffs now in place," said a team of Goldman Sachs equity strategists in a note released Monday. "But we believe the risk of a final round of tariffs on roughly US$300 bn of remaining imports from China has now risen to 30%."
Jason Pride, chief investment officer of Glenmede, said "ongoing trade issues threaten to derail the longer-term outlook," in a note he also issued Monday.
Where can investors turn as China and the U.S. refuse to back down in their trade war?
Services, Not Goods
"Services firms are less exposed to trade policy and have better corporate fundamentals than Goods companies and should outperform even if the trade tensions are ultimately resolved," said the Goldman strategists. In addition, Services stocks have less foreign input costs that might be subject to tariffs and are also less exposed to potential trade retaliation given they have less non-U.S. sales exposure than Goods companies."
Some services-oriented FAANG stocks, which usually get sold off when there's a risk-off sentiment, aren't exposed to China, and don't have input costs at all. Netflix (NFLX - Get Report) was down 4.39% to $345.18, Facebook (FB - Get Report) tumbled 3.15% to $182.41, and Alphabet (GOOGL - Get Report) declined 3% to $1,132.
Meanwhile, "We're looking at this as an opportunity," said Zev Fima, research analyst for Jim Cramer's Action Alerts PLUS portfolio. "We did a lot of trimming in anticipation of Chinese retaliation and are now looking at U.S.-based services names such as Twilio (TWLO - Get Report) , Shopify (SHOP - Get Report) and even healthcare-oriented services such as CVS (CVS - Get Report) and United Healthcare (UNH - Get Report) ." Twilio was down 7.68% to $124 on Monday. Shopify was downgraded Monday by Guggenheim as the stock has run up 83% this year.
"Small-cap stocks or ETFs could help give investors shelter from ongoing trade tensions," Mike Loewengart, vice president of investment strategy at E*Trade told TheStreet in an email. "Large- and mid-cap stocks tend to be large multinational companies which have international exposure. On the other hand, small-cap stocks tend to be more domestically focused companies with less business exposure to international trade."
Now may be a good time to buy small-caps as the Russell 2000 small-cap index has lost 5.4% since May 3, more than the main U.S. large-cap indexes.