Navigating Recession Risks and Finding Resilience in a Tariff-Driven Economy

The U.S. economy is navigating uncharted waters as tariff policies implemented since 2024 have reshaped consumer spending patterns, inflated prices, and intensified recession risks. With Treasury yields signaling economic uncertainty and sectors diverging in their resilience, investors must adopt a strategic lens to capitalize on opportunities while mitigating risks. Here's how to position portfolios in this tariff-driven climate.

Consumer Spending: The Tug-of-War Between Inflation and Caution

The rise in tariffs has created a paradox: short-term spending surges followed by prolonged retrenchment. In early 2025, consumers front-loaded purchases of big-ticket items like automobiles to avoid anticipated price hikes. This drove a 3.3% annualized rise in retail sales by March 2025, with auto sales spiking 11.4% due to 25% tariffs on imports. However, this demand surge was unsustainable. By May 2025, retail sales plummeted 0.9% month-over-month—the steepest drop since January—as households scaled back discretionary spending amid stagnant wages and higher prices.

The pain is unevenly distributed. Lower-income households, which spend a larger share of income on essentials like clothing (up 17% due to tariffs) and food (up 2.8%), face annual losses of $1,700 under current policies. In contrast, wealthier households, though affected by auto and luxury goods price hikes, have more flexibility to absorb costs. This divergence underscores the need for investments in resilient sectors catering to diverse consumer tiers.

Treasury Yields: A Recessionary Signal

The bond market is sounding alarms. The spread between 2-year and 10-year Treasury yields has inverted sharply since mid-2024, a historically reliable recession indicator. As of June 2025, the 2-year yield at 5.2% exceeds the 10-year yield at 4.5%, signaling reduced confidence in long-term growth.

This inversion reflects fears that the Fed's reluctance to cut rates (despite stagflation risks) and tariff-driven inflation will prolong economic pain. Investors should consider Treasury bonds as a hedge against a potential slowdown, though yields remain low by historical standards.

Recession Risks: The Perfect Storm?

The data paints a grim picture. J.P. Morgan estimates that current tariffs will reduce U.S. GDP by 0.9 percentage points in 2025, with a long-term contraction of 0.6%. Global risks are even graver: a 10% universal tariff and 110% China-specific tariffs could slash global GDP by 1%, with spillovers potentially doubling the damage.

Key indicators support these concerns:
- Consumer Sentiment: The University of Michigan index has dropped 17 points since late 2024, reflecting anxiety over prices and policy uncertainty.
- Business Investment: Capital spending has stalled as firms face higher input costs (steel and aluminum tariffs now at 50%) and trade policy uncertainty.

A 40% chance of global recession—up from 30% in early 2025—suggests investors should brace for volatility.

Resilient Sectors: Where to Find Shelter

Amid this turbulence, certain sectors are proving resilient:

1. Discount Retailers:
   Companies like Walmart (WMT) and Target (TGT) benefit from their ability to source domestically or offset tariff costs through scale. Their focus on lower-income shoppers—a group still spending on essentials—adds stability.

2. Healthcare and Utilities:
   Defensive sectors remain insulated from macroeconomic swings. Managed care companies (e.g., UnitedHealth, UNH) and utilities (e.g., NextEra Energy, NEE) offer steady cash flows and inelastic demand.

3. Domestic Manufacturers with Pricing Power:
   Firms like 3M (MMM) or Caterpillar (CAT) that control supply chains and can pass costs to consumers are less vulnerable to tariff disruptions.

4. Technology with Domestic Supply Chains:
   While semiconductor firms face global trade risks, companies like NVIDIA (NVDA) that invest in U.S. production (e.g., the $4 billion chip plant in Arizona) may outperform peers reliant on Asian imports.

Avoid sectors heavily exposed to tariffs, such as automakers (F, GM) and apparel retailers (PVH, TJR), unless they have hedged against input cost rises.

Investment Strategy: Balance Caution with Opportunity

• Sector Allocation: Overweight defensive sectors (healthcare, utilities) and discount retailers. Consider selective plays in technology and industrials with strong domestic footprints.
• Bond Exposure: Maintain a portion in Treasuries for liquidity and downside protection, despite low yields.
• Hedging Tools: Use inverse ETFs (e.g., SH, SDOW) to protect against equity declines, or inflation-protected bonds (TIPS) to offset price pressures.

Conclusion

The tariff-driven economy is testing consumer resilience and corporate agility. While recession risks are elevated, sectors that thrive in cost-conscious environments or control their supply chains offer refuge. Investors should prioritize flexibility—diversifying across defensive plays and hedging against market volatility—while keeping a wary eye on Treasury yields and policy developments. The path ahead is rocky, but strategic positioning can turn uncertainty into opportunity.