Let’s not mince words. It’s been a difficult start to the year.

What was already a struggling, choppy market in 2025 got smacked by the tariffs announced on Liberation Day.

That wouldn’t be so bad if there was any sense of clarity. The headlines keep changing by the minute, with the latest stories revealing China is escalating its reciprocal tariffs to match the U.S.

These are what we call “tape bombs” – when new information causes the ticker tape to bleed red. And that’s evaporated close to $10 trillion in value from the stock market over just three days.

In this sea of uncertainty, it’s important to study history for clues to what may lie ahead.

It’s becoming clearer by the day that President Donald Trump is set on a rebalance to trade… And over the short run, that could lead to an economic slowdown.

There’s no sense fearing the situation – it’s out of our control.

So, let’s look for a way to take advantage of a trying economic climate…

To do that, we’ll dive into two historical studies today:

  • First, we’ll look at how stocks behaved during previous unprecedented shocks
  • Second, we’ll study which areas of the market tend to hold up best when the U.S. experiences an economic slowdown

But first let’s take a look at the equity landscape.

Because some areas are already in a bear market…

One of the Quickest Bears Ever
It’s easy to forget that just six weeks ago, stocks were at all-time highs.

What we are witnessing is one of the steepest drops in equity prices ever… reminiscent of the COVID crash and Black Monday in 1987.

Below is a snapshot of major index returns from their respective peaks. The Nasdaq is now in a bear market, as are small caps and mid-caps – each down more than 20%.

At the S&P 500 sector level, we see that hardly any groups have been spared. Though safer groups like Staples, Utilities, Real Estate, and Health Care have all shown notable outperformance:

While this is unsettling to sit through, it’s important to step back and realize that eventually clarity will come.

These tariffs will reach compromises. And in time, markets will recover.

How do I know? Because the data shows it.

The below graphic details a few dozen geopolitical and U.S. events that occurred going back to 1979 – including the 1987 crash, 9/11 attacks, Great Financial Crisis bank collapses, U.S. debt downgrade, COVID, regional bank crisis, and more.

While the situation today is unique, investors reacted the same way – by initially going risk-off.

After major geopolitical events, the S&P 500 averages a -0.7% return a month later and a measly 1.2% lift three months later.

But look at the returns further out :

On the 12- and 24-month timeframes, stocks were higher 70% and 82.8% of the time, for average returns of 9.1% and 20.3%, respectively.

The takeaway is simple: Don’t panic… Look for opportunities.

Now, let’s dive into how you can potentially benefit in the current tariff tit-for-tat…

Top Sectors for an Economic Slowdown
One of the primary reasons stocks have been under so much pressure is due to a worse-than-feared tariff picture.

Leading into Liberation Day, the average tariff estimate clocked in at 12%. Based on calculations out of Evercore ISI, we could be looking at an average tariff of 29%.

This puts duties at levels not seen in over 100 years.

Now, I don’t know the economic impact that tariffs will have. But I think it’s safe to say that an economic slowdown is potentially coming.

If that’s the case, we can look back at prior slowdowns and see which areas performed the best.

Safety is the ticket…

Since 1960, during economic slowdowns, Health Care, Staples, Financials, and Utilities have led the charge with 12%-plus average returns:

This slowdown playbook is in play with Health Care (XLV), Consumer Staples (XLP), Utilities (XLU), and Financials (XLF) all massively outperforming the S&P 500, which is down 13.5% year-to-date:

Now, to be clear, the waves of uncertainty are extreme right now. And the safety trade should keep these bellwether groups at the leaderboard until we get clarity from the Oval Office.

And rest assured, we will… This painful drawdown will surely not last forever.

However, here are two signal studies to help your portfolio stay afloat until calmer days arrive.

First, let’s focus on leadership.

For that we’ll turn to the Utilities space, which is one of the safest areas of the market. It’s domestically focused, and consumers will keep the lights on no matter what the economy does.

The Utilities Select Sector SPDR Fund (XLU) fell 5.5% on Friday. We were only able to find 14 prior days with a drop of that level or greater.

In all periods from one week to two months, the basket of dividend-rich stocks is higher.

And from two weeks to two months, the positive hit ratio is 86%:

In a similar vein, let’s look at another group with leadership qualities in the wreckage: Health Care stocks.

We know the Trump administration has excluded pharmaceuticals from tariffs. That is one reason for the outperformance in 2025.

But we also know, like Utilities, consumers will pay for drugs and medical needs in any climate.

The Health Care Select Sector SPDR Fund (XLV) dropped 5.6% in three days. Since 1999, we were able to find just 57 similar or larger pullbacks in that timeframe.

Look how the odds are stacked in your favor for upside over the next two months:

To wrap up, here are my closing thoughts.

As an investor, it’s easy to say, “It’s different this time.” And you’re correct. The tariff regime is different than anything we’ve ever seen.

But we shouldn’t let that drive us away from investing altogether.

The difficult but worthwhile approach is to focus on cold, hard data and let evidence guide our path.

Health Care and Utility stocks tend to offer ballast during stormy seas.

As headlines bob and weave over the coming days, weeks, and months… Rest assured that eventually equities will thrive again.

It’s in these rare times when software cuts through the noise… offering an unbiased data-driven approach.

Hang in there, everyone!

Regards,

Lucas Downey

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Source: TradeSmith