How to Hedge Against Tariffs

In keeping with the newly elected president's motto of "promises made, promises kept," Donald Trump can be expected to boost tariffs on imports in the coming months.

- JAMES K. GLASSMAN

Most economists believe the effects will likely include a stronger dollar, higher inflation and interest rates, a decline in growth for countries that export to the U.S., and retaliation by at least some of them. In the short term, the fallout will probably depress the profits of American companies with strong sales abroad.

S&P Global reports that international sales represent 28% of the total revenues of the 103 members of the S&P 500 that report such statistics.

For example, the proportion of foreign sales is 70% at Boeing, 57% at Nike and 41% at John Deere. If you want to hedge against the probability of a trade war, then you should stay away from the exporters and think domestic.

Goldman Sachs recently listed 50 constituents of a "domestic sales basket," with emphasis on such sectors as consumer staples, financials, homebuilders and health care. The list has some good choices--and I will get to them. But first, understand why many of these all-domestic stocks will, nevertheless, be harmed by tariffs.

Here come higher prices.

Target immediately caught my eye. Although its stores are all in the U.S., the company noted in its 2022 annual report that "a large portion of the merchandise that we offer is sourced, directly or indirectly, from outside the U.S., with China as our single largest source." Any major change in tariff or tax policy "could require us to take certain actions, including raising prices on products we sell." Those higher prices-not just at Target but elsewhere in the economy, too-will probably discourage spending overall. Even with 100% domestic sales, Target and other retailers will be hurt by tariffs.