Markets on edge: Trade wars, geopolitical risks and the uncertainty trap

Key points:

• Economic uncertainty is rising, with early signs of a slowdown and cautious sentiment from businesses and consumers.
• Tariff tensions are escalating, but markets still see them as a negotiating tool; supply chain shifts and industrial automation could be long-term winners.
• Geopolitical risks remain high, with fading Ukraine peace hopes, increased European defense spending, and heightened market volatility.

Markets are grappling with an increasingly complex backdrop. Economic uncertainty is rising, trade tensions are escalating, and geopolitical risks remain front and center. Whether we see resolutions on some of these fronts or not, the uncertainty itself is likely to linger and is enough to make businesses, consumers and investors cautious.

So, what’s happening, and how should investors think about positioning in this environment? Let’s break it down.

Economic uncertainty: Slowdown or just jitters?

The economic outlook is becoming more fragile, and we wrote earlier about the signals that indicate that US exceptionalism could fade. While real data remains stable, surveys suggest businesses and consumers are turning cautious. This hesitation is already leading to delayed spending and investment decisions, raising concerns about whether growth could slow further. The latest Atlanta Fed GDPNow estimate for Q1 shows growth tracking at -1.5%, down from +2.3% previously.

Meanwhile, the AI-fueled market rally may be cooling off. While AI remains a long-term growth driver, competition and stretched valuations could mean a more muted impact on markets in the near term.

Market takeaway:

• Quality companies with strong balance sheets and pricing power tend to perform better in uncertain environments.
• Defensive sectors such as healthcare, utilities, and consumer staples may provide stability if growth concerns escalate.
• If inflation continues to ease, the case for a June Fed rate cut strengthens, making bonds an attractive hedge.

Tariff uncertainty: Bringing production to America

The US is set to implement tariffs on imports from Canada and Mexico starting March 4, and tariffs on China have also been escalated to 10%+10%.  These measures aim to address concerns over illegal immigration and drug trafficking, but they have also raised economic concerns and potential retaliatory risks.

Markets still believe tariffs remain a negotiating tactic rather than a broad-based policy shift. Mexico has aligned with U.S. demands by imposing tariffs on China, suggesting a potential de-escalation of trade tensions between Mexico and the U.S.

However, China’s response will be critical. Authorities are evaluating counter-measures, which could include retaliatory tariffs or restrictions – with U.S. agricultural and food products likely in the crosshairs. Such moves could raise the risk of market volatility.

Market takeaway:

• Tariff-sensitive sectors (tech, consumer goods) could face pressure if trade disruptions escalate.
• Industrial automation and construction could benefit as tariffs drive production back to the U.S.
• Companies with flexible supply chains and strong pricing power may navigate trade tensions better.
• Defensive plays like utilities and healthcare could provide stability amid trade-related volatility.
• Low volatility, high dividend stocks, which we screened for in this article, could provide both capital preservation and steady cash flow, making them a compelling option for defensive investors.

Geopolitical uncertainty: Peace deal or not?

Hopes for a Ukraine peace deal faded after last week’s Oval Office meeting between President Trump and President Zelenskyy ended without a minerals deal and with a canceled joint press conference. However, Zelenskyy has since signaled openness to meeting Trump again and signing a deal, keeping the door open for future negotiations.

Meanwhile, Europe is stepping up its defense commitments. The U.K. and France are spearheading a “coalition of the willing” for peacekeeping efforts and greater military support for Ukraine. The European Council is set to discuss a €20 billion military package this week, with some leaders pushing for a €200 billion increase in defense spending and a target of 3-3.5% of GDP for military budgets.

Market takeaway:

• Gold, European defense stocks and energy commodities could see renewed demand as geopolitical volatility persists even if a peace deal is reached.
• European stocks have outperformed recently, but can this continue with heightened risks? Investors should watch for sentiment shifts.
• Anticipated increases in defense spending could lead to higher debt issuance across Europe, impacting bond markets. German and French bond futures have already experienced declines, indicating investor caution.

Staying ahead without losing sleep

Reacting to every headline is exhausting, but ignoring risks isn’t an option. Here’s how to stay invested without the stress:

1. Focus on fundamentals, not headlines

Markets swing, but strong businesses adapt. Instead of chasing every move, focus on earnings, consumer demand, and central bank policy.

2. Think Like a business, not a trader

Companies adjust to uncertainty by shifting supply chains and passing on costs. Investors should do the same – look for adaptable sectors.

3. Hedge against uncertainty, but stay balanced

Gold, Treasuries, and European defense stocks offer stability, but too much can limit long-term growth potential. The key is balance.

4. Accept that uncertainty is the new normal

Waiting for “clearer” conditions can mean missed opportunities. Markets always have risks, but discipline wins over time. If worried about volatility, consider dollar-cost averaging (DCA) to manage risk.