Barclays: Trump's tariff risks are being overlooked and the downturn in raw material stocks may worsen.

Barclays stock derivative strategist Stefano Pascale said that option traders have underestimated the risks faced by commodity stocks, allowing bearish investors to protect themselves from losses resulting from Trump's tariff agenda at a lower cost. Pascale stated that the expected volatility of the commodity sector is at its lowest level in nearly twenty years compared to the S&P 500 index, making buying downside protection relatively cheap. The sector's price fluctuations are relatively mild compared to the broader U.S. market, especially when compared to tech stocks. However, due to reliance on global supply chains, including steel manufacturers and paper producers, the commodity sector appears to be vulnerable to the Trump administration's trade measures. Trump is expected to announce more tariffs on Wednesday. The current cost to hedge against further losses in commodity stocks may be disconnected from the deeper risks of a downturn, especially considering the damage suffered by commodity stocks in Trump's first term due to protectionist policies. Pascale said, "The volatile market is providing an excellent opportunity to buy cheap downside options for commodity stocks. Even without a trade war, historically speaking, this is a very attractive trade." He and Barclays strategist Anshul Gupta suggest selling put options on the S&P 500 index and buying put options on the commodity sector. During the significant stock market downturn in March, the performance of tech stocks lagged far behind traditional value sectors such as energy and materials. However, looking back at 2018, commodity stocks performed second worst in the S&P 500 index due to Trump's tariffs on steel, aluminum, and durable goods. Similar trends are occurring now, with Dow, Inc. (DOW.US) stock dropping 13% year-to-date. Pascale said, "If we start to see weak economic data and evidence that tariffs are indeed dragging down economic growth, I believe these industries will start to follow the downward trend of large-cap tech stocks." Data compiled by Bloomberg Intelligence shows that sell-side analysts have lowered expectations for the commodity sector, forecasting a 5.9% earnings growth for the sector this year, significantly lower than the 16% predicted in January.