Think Small As Trade War Fears Grip Market: 5 Must Buys

Wall Street continues to apprehend a potential trade war due to President Trump’s protectionist stance. Trump has planned to levy tariffs on steel and aluminum coming into the United States, a move that has faced opposition from House Speaker Paul Ryan and compelled chief economic advisor Gary Cohn to resign. Both raised concerns that other countries will retaliate, increasing the odds of a trade war and harming the global economy.

The European Union (EU) is preparing retaliatory tariffs on iconic U.S. brands, while fears of a full-fledged trade war since the 1930s has been raised by the head of the World Trade Organization (WTO).

As uneasiness about trade policy spikes, small-capitalization stocks remain fairly immune to the adverse effects. And why not? These stocks have high domestic exposure in terms of revenue generation, which shields them from international disputes. Thus, investing in sound small-caps seems sensible at the moment.

Ryan Can’t Legally Stop Trump’s Tariffs

Trade continues to be the primary focus for investors after Trump planned to raise tariffs on imported steel and aluminum. But, key Republican Ryan expressed concerns that such tariffs will lead to a trade war. It will also jeopardize the positive impact the tax overhaul policy had on the economy. Ryan requested the President to take a “surgical” approach rather than applying penalties on all imported steel and aluminum. However, Trump told reporters, when asked about Ryan’s comments that “no, we’re not backing down” from imposing tariffs.

So, can the Congress stop Trump from starting a trade war? The answer is no. After all, it is the Congress that has enacted laws over the past century that authorizes the President to impose tariffs. Trump has chosen the Trade Expansion Act of 1962 — Section 232 that clearly states that the President can impose tariffs on all other countries only if imports pose a threat to U.S. national security. Trump argued that steel and aluminum imported from Canada, Mexico and all other countries pose a risk to national security, something that baffled world leaders.

Cohn’s Resignation to Spark a Global Trade War

The head of Trump’s National Economic Council, Gary Cohn’s resignation was a setback for world leaders. Cohn was viewed as part of a globalist faction in the Trump administration who called for a moderate approach toward protectionist trade policies.

Cohn, a former Goldman Sachs Group Inc. (NYSE:GS) executive, is viewed by many market pundits as a level head within the Trump administration. He was chief architect of the business-friendly tax cut policy signed into law last year. Thus, the President’s top economic advisers’ resignation has raised concerns that Trump is set to soon adopt a protectionist stance.

The European Union Strikes Back

Trump’s tariff announcement has already evoked anger among global leaders, with the EU saying that it will impose tariffs on 2.8 billion euros ($3.5 billion) worth of U.S. imports, per Reuters. Tariffs will be implemented on a range of consumer, agricultural and steel products imported from the United States.

According to EU’s executive arm, the Brussels-based European Commission, the target list includes imported shirts, jeans, cosmetics, other consumer goods, motorbikes and pleasure boats totaling 1 billion euros; orange juice, bourbon whiskey, corn and other agricultural products worth 951 million euros, and other industrial products of around 854 million euros.

WTO Warns Trump Not to Escalate Trade War

The WTO, in the meantime, warned Trump that his proposed tariffs will trigger tit-for-tat protectionist measures, leading to a global recession. Roberto Azevedo, the WTO’s director general, said that “in the light of recent announcements on trade policy measures, it is clear we now see a much higher and real risk of triggering an escalation of trade barriers around the world.”

WTO officials said that the EU, Mexico, Japan, Australia, South Korea, Canada and India were among the prominent members that expressed “very strong concerns” regarding Trump’s proposal. But, Trump remained defiant and said that he won’t back down.

Is a Trade War Brewing? Buy 5 Small-Cap Stocks

As prospect of a potential trade war looms large, investing in small-cap stocks seems judicious. Due to their limited international exposure, small-caps offer higher protection than their large- and mid-cap counterparts against any global downturn.

We have, thus, selected five small-caps that should make meaningful additions to your portfolio. These stocks flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy). The search was also narrowed down with a Zacks Investment Research

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Written By: Zacks Investment Research