With stock prices taking deep dives in recent days, investors are scrambling for protection by making bets on a big decline in the S&P 500, according to MarketWatch.
What has investors so worried? Several forces are fueling investor concern: uncertainty about geopolitics and prices, increasingly strained consumers as tariffs raise costs for U.S. businesses which will raise prices to preserve profit margins, and a rising risk of recession as consumers spend less.
The Fed is clearly dealing with considerable uncertainty: Should it raise interest rates to crimp inflation caused by tariffs or cut interest rates to nip a recession in the bud?
What should investors do about this? As I describe below, the answer depends on how much you need cash now and your view of the longer-term future .
Investors Seeking Crash Protection
Investors are bidding up the price of protection against a stock market crash. During the last week of February, options traders bought options whose value will increase if the value of the S&P 500 index plummets, MarketWatch reported.
More specifically, as the S&P 500 and Nasdaq indices last month suffered their worst two-week drop since September 2024, traders bought call options – the right, but not the obligation to buy a security at a higher price in a future month – tied to Wall Street’s fear gauge: the Cboe Volatility Index.
Such call options become valuable if the VIX rises and that happens when investors expect the S&P 500 to keep going down. The VIX has risen 50% — from about 15 since February 19 when demand for those options began to rise – to nearly 24 on March 5, according to Google Finance.
However, the options are only of value if the VIX more than doubles to 50. This suggests traders are afraid of much worse ahead – a scary event on the order of a global pandemic.
How so? The volume of those crash protection bets – 260,000 contracts for May 55-75 strike calls – was the second highest ever, noted MarketWatch. The VIX has not traded above 50 since the Covid-19 pandemic began in the U.S. – in March 2020, according to FactSet data.
Tariffs Causing High Business And Consumer Uncertainty
What could investors be afraid of? Uncertainty among business leaders and consumers, rising business costs due to tariffs, and the high likelihood business leaders will raise prices to limit the damage to their margins.
Uncertainty Among Business Leaders
Since Trump took office, consumer and business confidence has declined. The University of Michigan’s preliminary index of consumer sentiment, based on surveys conducted since Trump’s inauguration, dropped in February. A post-election rise in small-business confidence was reversed in February, according to Vistage Worldwide. And January 2025 was “the quietest January in a decade for mergers and acquisitions announcements,” noted the Wall Street Journal.
Economic uncertainty is paralyzing business leaders. “There is so much turmoil,” Ethan Karp, CEO of Cleveland-based Magnet, told the Journal. “People don’t know what is going to land. Even though there is potential long-term benefit to the tariffs in terms of reshoring, the immediate things that are happening is just turmoil.”
Blu Monaco, a Warminster, Pennsylvania office supplies and stationary retailer, does not know how to respond. Blu Monaco asked its Chinese manufacturer for a 10% discount to offset the cost of higher tariffs—otherwise, “I’m going to increase [prices] five percent across the board,” owner Alicia Chong told the Journal.
One Chinese manufacturer said it would give Blu Monaco a discount if the company increases its order quantity. Chong does not want to take the cash flow risk of buying more than she needs. She also considered partnering with a Vietnamese manufacturer, but is waiting because she worries Trump may impose tariffs on Vietnam, the Journal noted.
Wyoming Machine, a 45-person Minnesota sheet metal fabricator importing aluminum from Canada, is struggling to operate. “There is a lot of uncertainty in business no matter what we do,” co-president Traci Tapani told the Journal. “The president going back and forth every few days about what is going to happen with these tariffs is not helpful.”
New Tariffs On Canada, Mexico And China Could Raise Consumer Prices
Tariffs put into effect March 4 on goods imported from Canada, Mexico and China could result in higher prices for Americans, noted the New York Times.
After the U.S. imposed tariffs on goods from these countries, Canada, Mexico and China raised tariffs on U.S. exports to their markets. Tariffs on products from China to the U.S. are now subject to a 20% tax – up from 10%; all goods from Mexico and most from Canada – with the exception of energy products which face a 10% tariff – are subject to a 25% tax, the Times wrote.
China counter-tariffed – placing a 15% tax on the country’s U.S. imports of chicken, wheat, corn and cotton and a 10% tariff on other agricultural products while Canada imposed a 25% tariffs on $30 billion worth on unspecified U.S. goods, noted the Times.
U.S. consumers could soon pay more for groceries and other products. As the Times reported, higher prices for the following could be hit American wallets:
- Mexican avocados, tomatoes and strawberries;
- Mexican beer and tequila;
- Canadian meat, grains, and maple syrup;
- Automobiles as automakers weekly ship “tens of billions of dollars’ worth” of finished vehicles, engines, transmissions across the U.S. borders with Canada and Mexico while China exports automobile parts to the U.S.
- Gasoline – particularly in the Midwest since 60% of oil imports to U.S. refineries come from Canada;
- Chinese consumer electronics — such as cellphones, computers and video games; and
- Canadian softwood lumber and gypsum – which is used for drywall — could raise already high housing prices.
Executives Will Pass Along Higher Costs To Consumers
U.S. companies will pay the tariffs and most executives will not accept lower margins. Instead, they will pass along their higher costs to consumers by raising prices, according to an EY-Parthenon economist featured by CNBC.
An EY survey of 4,000 executives found half said they would charge consumers two-thirds of the added costs from tariffs. “Businesses today, they don’t care about whether the tariffs are coming tomorrow or in a week – they’re preparing [and] trying to build resilience,” EY-Parthenon chief economist Gregory Daco told CNBC.
A case in point is Best Buy which import significant quantities of consumer electronics from China and Mexico. “We expect our vendors across our entire assortment will pass along some level of tariff costs to retailers, making price increases for American consumers highly likely,” CEO Corie Barry told analysts March 4, noted the Journal.
Rising Recession Risk
With consumer spending accounting for about two-thirds of U.S. economic growth, should consumer spending fall so could gross domestic product. The higher prices could lead consumers to spend only on what they need most and skip discretionary items. Moreover, the possibility of large numbers of government job cuts may contribute to the growth problem.
Economic and market data also support the higher risk of recession. On March 3, “a closely watched model of gross domestic product level, the Federal Reserve Bank of Atlanta’s GDPNow, estimated significant decline of 2.8% in annualized growth for this quarter. This is a sharp contrast from a 2.3% increase last week,” reported Forbes.
Meanwhile, last month short-term interest rates rose above longer term ones – creating an inverted yield curve – the “Federal Reserve’s favorite recession indicator,” according to CNBC.
The yield curve inverted in February when the 10-year Treasury yield passed below that of the 3-month note. This move could predict a recession because it indicates “the Fed will cut short-term rates in response to an economic retreat in the future,” noted CNBC.
The bond market smells “recession in the air,” FWDBONDS chief economist Chris Rupkey told CNBC. The yield curve inversion “is a pure play on the economy being not as strong as people thought it was going to be at the beginning of the Trump administration,” he added. “Whether or not we’re forecasting a full-blown recession, I don’t know. You need job losses for a recession, so we’re missing one key point of the data.”
What Investors Should Do
The answer depends on how long you have to wait out the current turmoil. If you think you will need to turn your investments into cash in the next five or so years, it may be worthwhile to consider selling equities or buying portfolio insurance. Otherwise, continuing to buy as stock prices fall may be a good – if emotionally challenging — approach.
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