Amid intensifying U.S. policy uncertainty, investors are advised to reinitiate risk-off trades, according to BCA Research. With tariff implementations scheduled for March and April, market volatility is expected to rise, prompting a tactical shift toward defensive equities.
Shifting Market Strategy: Favoring Defensives Over Cyclicals
BCA Research strategists, led by Matt Gertken, have renewed their defensive trades. They recommend a tactical overweight of U.S. defensive sectors relative to cyclicals, with a particular focus on Health Care over Technology. As they explained:
“We are reinitiating our defensive trades. Cyclically, go long US defensive equity sectors relative to cyclicals. Specifically, favor Health Care over Tech.”
This strategic move comes amid growing uncertainty over U.S. trade policies and fiscal issues that are likely to drive further market volatility.
Political and Fiscal Uncertainty Looms
Key concerns fueling this cautious stance include:
Uncertainty over Tariff Policies: With tariff implementations on the horizon, investors face increased risk as U.S. trading relationships are poised to be reshaped.
House Budget Resolution and Fiscal Policy: The recent House budget resolution was seen as “merely procedural” and is set for renegotiation. This process is expected to result in higher budget deficits.
Risk of a Government Shutdown: Congress faces a March 14 deadline to pass a continuing resolution. Given the narrow Republican majority in the House, passing this measure without bipartisan support could be challenging—even though Trump’s willingness to pressure GOP lawmakers makes it a possibility.
Geopolitical Risks: While ongoing Ukraine talks provide a glimmer of optimism, the risk of oil price shocks remains high, adding to the overall uncertainty.
Additional Considerations: Small Caps and Broader Policy Risks
In addition to favoring defensive sectors, BCA Research suggests that investors should maintain a long position in U.S. small caps relative to global small caps. Although small caps are expected to decline in absolute terms, their relative performance may offer a tactical edge amid the broader risk-off environment.
Overall, sharp spending cuts, unpredictable tax policies, and heightened geopolitical risks are expected to further amplify economic policy uncertainty, suggesting that market volatility could persist.
Monitoring the Market
For investors seeking to track shifts in market sectors during this period of uncertainty, Financial Modeling Prep’s Sector Historical Overview API provides real-time insights into the performance of defensive sectors versus cyclicals. This data can help inform tactical adjustments as the economic and policy landscape evolves.
