Wall Street is trying on Tuesday to claw back some of its losses suffered over the past week.
The Dow Jones Industrial Average has rallied 350 points, though it remains more than 3% lower for the month.
But the worst may not be over yet.
To hedge against any downside risk, Kevin O'Leary, chairman of O'Shares ETFs, is looking for a particular kind of protection play.
"I'm now focusing on balance sheets. I'm going to assume volatility, I'm going to assume worst case we'll have a long trade war, maybe it goes right to the election, who knows. At points like this, maybe moving up the quality is a little better in terms of risk taking. So I'm just looking at large entities that generate a lot of cash that are reducing their debt and also are returning capital to shareholders through either dividends or stock repurchases. And when you screen the market for that, you find some really high-quality companies across multiple sectors."
Mandy Xu, chief equity derivatives strategist at Credit Suisse, says investors should keep on their toes.
"Throughout this year investors have consistently underpriced the risk around trade and around potential escalation. So one of the things we pointed out two weeks ago was actually emerging market equity volatility had fallen to a one-year low, and that was despite emerging market credit spreads rising, that was despite stronger dollar, that was despite obviously ongoing trade negotiations. So this tells you that investors have consistently been too optimistic around this issue."
Noah Weisberger, managing director of U.S. portfolio strategy at AB Bernstein, says downside is more likely than upside right now.
"We are highlighting the downside, and we've thought about tariffs as mostly being focused on corporate margins, almost ignoring for now the impact on aggregate demand by really focusing on price increases and what that could do. So we've recently been talking about 2,650 as a possible floor here if we saw EPS come down, if we see multiples take a turn lower, so perhaps rationally the market has gone halfway to that already. We're not changing our target yet but even before the trade talks flared up, we had limited upside for the year. We thought a lot of the big catalysts had come through the system, and that's probably where we remain for now."
Simeon Hyman, global investment strategist at ProShares Advisors, sees opportunity in one asset class.
"We had about a 4% pullback this month. Lower interest rates support multiples, so the valuation case isn't a bad one. If you're looking for places where maybe some pain has already been felt, one of the interesting places is midcaps. Margins already started to decline in Q4 in midcaps and after a three-decade run of good outperformance, they've underperformed in 2017 and 2018 and already going into this year, so there are pockets of the market where there is opportunity."
Ben Mandel, global strategist at J.P. Morgan Asset Management, sees a silver lining in the trade escalation this month.
"We're thinking about trade-induced volatility as potentially introducing some buying opportunities in equities. And I think there are a few reasons: One is that despite being bad news last week was not the worst news that it could have been. There's still a path back to the negotiating table that you can see. Second is the economic feedback of the tariffs themselves. There is a case to be made that it's much worse to introduce tariffs on new products than to increase the rate on exiting tariffed items. So going from 10% to 25% is not good, but incrementally it's not as bad because a lot of the weaker links in that supply chain were already picked off at the end of last year."
Mohamed El-Erian, chief economic advisor at Allianz, says the purpose of the tariff hikes is key to the outlook.
"I think the major change going on in the market mindset right now is the journey versus the destination. For quite a while we all expected the tariff tit-for-tat to be part of a journey that still leads to free but fairer trade. Now there's growing concern that these higher tariffs might be part of a destination, and that's a completely different calculus for the market."
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