The US just announced a new wave of tariffs – and moreover, the uncertainty over what comes next - threatens to trigger stagflation and delay recovery. Investors should think defensively.
Key Points
- The U.S. announced its broadest tariff package yet, with Asia-Pacific and the EU among the hardest hit.
- Retaliation is expected, creating a feedback loop of economic disruption.
- Stagflation risk rises, limiting the Fed’s ability to manage the economy effectively.
- Policy volatility adds uncertainty, slowing corporate investment and household spending.
- Investors should consider rotating into cash or defensive sectors, particularly domestic service names with low trade exposure.
The Tariff Spiral Begins
The U.S. Administration has unveiled its most sweeping tariff policy to date—targeting every major trading partner and placing the heaviest burden on Asia-Pacific countries and the EU bloc.
What comes next? Retaliatory tariffs from affected regions, followed by a likely second wave of U.S. measures. And so the cycle begins…
Two Key Risks: Stagflation + Instability
There are two core risks emerging from this announcement:
- Stagflation:
Tariffs raise prices and suppress growth. That’s a recipe for stagflation, the economic no-man’s-land where inflation rises even as output slows. The Fed’s traditional policy tools —based on the inverse relationship between unemployment and inflation — don’t work well in stagflationary environments.
As we’ve discussed in prior notes, the Fed can’t ease policy during stagflation without risking runaway inflation. Instead, it is often forced to tighten aggressively into a slowdown, potentially deepening the recession (See: Paul Volcker’s Fed from 1979 to 1983).
- Instability from incremental policymaking:
By announcing tariffs in waves, the government prevents the economy from finding a new equilibrium. Constant policy “tinkering” breeds uncertainty, and in uncertain environments:
This combination — policy uncertainty plus price shocks — creates a real drag on growth.
What Should Investors Do?
In this environment, capital preservation and domestic focus should take priority.
We recommend:
- Rotating into cash or defensive names
- Prioritizing sectors insulated from trade volatility, especially domestic services
Some of our preferred ideas include:
- Property & Casualty Insurance: ALL, PGR
- Administrative and Payroll Services: ADP, PAYX
These are sectors with stable cash flows, low international exposure, and strong pricing power—attractive traits in a stagflationary or policy-uncertain world.
