Are you nervous about the Dow’s wild swings, brought on by trade war tweets from President Donald Trump or announcements from China saying a trade deal with the United States is on or off the table?

Get used to it. 

Market volatility driven by trade and tariffs isn’t likely to fade anytime soon despite the two economic superpowers agreeing Friday to a “Phase 1” deal.  The United States agreed to roll back some tariffs on Chinese imports and cancel a round of levies that was set to hit Dec. 15. In return, China agreed to boost its purchases of U.S. agricultural products.

“Pandora has opened the box. Trade strife is here to stay,” says Jeff Mortimer, director of investment strategy at BNY Mellon Wealth Management. “There’s not going to be a single document, (or) signing of a ‘Phase 1’ deal, that makes it go away.”

The “Phase 2” and “Phase 3” deals between the world’s two biggest economies might be even tougher to hash out as issues such as theft of U.S. intellectual property and Chinese currency manipulation are complicated. 

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“Any optimism will dissipate pretty fast after a Phase 1 deal,” says Christopher Smart, chief global strategist at Barings Investment Institute.

That means 401(k)  investors can expect periodic market drops on negative trade news, such as the Dow’s 724-point plunge March 22, 2018, when Trump first proposed hitting China with $60 billion in tariffs.

Stock performance won’t be all bad. Expect triple-digit gains when positive headlines boost optimism on trade and growth.

U.S. stocks have climbed 26% to record highs in 2019 despite trade uncertainty, Smart notes. The U.S. economy, driven by Federal Reserve rate cuts and a strong consumer benefiting from the lowest unemployment rate in 50 years, hasn’t suffered a major hit from trade unrest. The economy grew by about 2% in the third quarter. Corporate earnings growth, though less robust than in 2018, remained positive this year.

“Investors need to keep trade headlines in some perspective,” Smart says. 

Still, investors face risks and opportunities related to trade.

Investment portfolios could face challenges from other trade spats, such as Trump’s threat to reimpose tariffs on imports of steel and aluminum from Brazil and Argentina and his proposal to slap duties on $2.4 billion of French products, including cheese and champagne, in retaliation for Paris levying a 3% tax on U.S. tech firm sales in France.

What’s a 401(k) investor to do? Should you put up a wall around your stock holdings to dodge any future, trade-driven sell-offs? Or climb out of your bunker and bet that the trade dispute won’t deteriorate or perhaps that it'll even be resolved in a bullish way?

For now, since both countries are set to sign off on a “skinny deal,” removing one big risk facing the market, stock investors should look for ways to “play offense,” says Phil Orlando, chief equity strategist at Federated Investors. 

Though the Phase 1 deal doesn’t remove all the uncertainty facing investors and corporate CEOs, it does signal progress. It should reduce recession fears and limit the hit to earnings of U.S. companies that would be hurt most by an escalation of the trade war. The thaw in relations between China and the United States should help keep the stock market’s upward trajectory on track and boost investors’ willingness to be more aggressive with their stock investments as the global growth outlook improves.

Deal is sealed! How to profit

The trend of the stock market and other risky assets, such as oil, getting a lift when there’s “good news” on the trade front should continue in the wake of a Phase 1 deal.

“If trade war risks go down, markets rally,” Mortimer says. The stocks that will rally the most, he predicts, are ones most “tethered to economic growth.”

They include shares of industrial companies, such as heavy-equipment makers, or oil and natural gas companies that fuel growth. Or “cyclical” stocks, such as automakers and aerospace companies, that move up and down in tandem with the economy.  “They would do best,” Mortimer says.

Now that the Phase 1 deal is done, U.S. agriculture, such as soybean farmers, could see their asset values rise, Orlando says. Another offensive play: Invest in emerging markets, as these economies are more exposed to China. What’s good for China and the global economy is good for developing markets. “We moved emerging markets back into the buy column a few months ago,” Orlando says.

Now that President Trump has canceled the next round of tariffs targeting Chinese imports of consumer electronics, such as smartphones, laptop computers and other gadgets, shares of U.S. companies that sell these products will get a reprieve, Smart says. “If we didn’t get a deal, these companies would have been immediate victims,” he says.

Similarly, stocks with large sales exposure to China, such as semiconductor makers, should enjoy a relief rally, says James Lucier, managing director at Capital Alpha.

How long the relief rally lasts depends on how well the trade negotiations between China and the United States play out. The Phase 2 and Phase 3 parts of the Chinese/U.S. deal could drag out well into next year or even longer, Wall Street pros say. That leaves a lot of time for talks to sour and investor sentiment to turn downbeat again.

“If the trade war escalates, markets could react negatively,” Mortimer says.

Ways to insulate your portfolio

If trade talks break down, stock prices will probably fall. Here are a few ways to play defense:

“How do you protect yourself?” Orlando says. “Raise cash and de-risk the stock portion of your portfolio.” 

Take profits on high-flying stock winners and move the money into less risky investments such as dividend-paying stocks: utilities, telecom companies and real estate investment trusts (REITS). Parking money in cash and U.S. government bonds also is a good defensive play.

“You could certainly hide out in Treasurys,” Orlando says. 

Another way to avoid harm from renewed global trade headwinds is to tilt your holdings toward domestically focused U.S. stocks whose sales and supply chains won’t be hurt by tariffs, Lucier says. “You could keep a domestic focus,” he says.

Mortimer sums up the the trade-tiff-relapse portfolio: “If the global economy slows, you’d want a portfolio that screams safety," he says. "You want bonds and fixed income.”