The JPMorgan strategy chief who called the tariff threat slams Trump's trade policy and shares 5 ways to hedge against a downturn as recession risk rises

• Tariffs are all the talk in markets, especially since US trade policy is ever-evolving.
• Strategy chief David Kelly shared why he's highly critical of Donald Trump's tariffs.
• Here's where investors should shift their money to if tariffs prove to be troublesome.

Market veteran David Kelly is outspoken, but thoughtful; moderate, yet opinionated.

JP Morgan Asset Management's chief global strategist is also mild-mannered and even-keeled — at least until he's asked about tariffs like those President Donald Trump is implementing.

"I don't approve of tariffs as an economist," Kelly said in a recent interview. "This is not political. I don't approve of Democratic tariffs or Republican tariffs. It's just stupid."

Kelly's strong anti-tariff stance is well-established. He told Business Insider before the election that the tariffs Trump campaigned on were a serious and underrated risk since they could cause a global trade war. He reiterated that warning after Trump won, even as US stocks soared.

Tariffs take center stage, for better or worse

Months later, investors are finally focusing on tariffs, which are import taxes designed to boost domestic industries while generating revenue for the government. US stocks took a big hit in anticipation of new tariffs late last week, before cutting those losses in early February.

Tariff critics like Kelly say trade restrictions make foreign goods more expensive for consumers and can lead to counter-tariffs, which can hurt exports and result in higher prices for everyone. He refers to tariffs as a "stagflation elixir" since they can slow growth and spark inflation.

In certain cases, tariffs — or, more accurately, the threat of tariffs — appear to be effective. Trump defenders can point to how the president has used tariffs as a negotiating tool to score political concessions from Colombia, Mexico, and Canada, though China isn't budging yet.

But Kelly fears that when it comes to tariffs, Trump isn't simply bluffing.

"I think it's a little more serious than that," Kelly said. "The problem is he said that he's going to use tariffs as a revenue source to try and fund part of the massive tax bill that's going to have to go through Congress later on this year. And I think that, plus the fact that he actually really likes tariffs, means that we will probably end up with some universal tariff anyway."

Across-the-board tariffs would be a huge hindrance for the US economy and, by extension, stocks, in Kelly's view. The extent of the damage depends on how steep import taxes are.

"I think we will probably avoid any catastrophe here, but that is on the assumption that we end up with tariffs at a universal 10% rate, as opposed to this 25% that was being levied on Mexico," Kelly said.

Although Kelly isn't calling for a recession yet, he said tariffs make an economic downturn far more likely. He estimates that protectionist trade policies will weigh on consumer spending while giving inflation a jolt, potentially lifting already-rising inflation by a whole percentage point.

Companies may hold off on shipments or purchases altogether, Kelly said, seconding a point made last month by strategists at UBS Global Wealth Management. The lack of clarity, and constantly changing plans, could lead to headaches.

"Particularly when you've got integrated supply chains, such as we have in the US auto industry, you could absolutely see — and this may still happen — US auto companies saying, 'Well, we're not going to ship anything across the Canadian border because we'd be absolutely foolish to pay 25% now when, if we waited a week, we might be able to avoid it altogether,'" Kelly said.

Perhaps most troubling is that tariffs risk isn't being properly priced into US stocks, which are still trading at ambitious levels, in Kelly's eyes.

"Current stock market valuations are pricing close to perfection," Kelly said. "And I would regard a big dollop of tariffs as a significant imperfection."

5 ways to insulate against tariff risk

Despite Kelly's concerns about tariffs, he still thinks US equities are a solid long-term bet.

However, it's past time for investors to reduce their reliance on mega-cap growth stocks that have thrived in recent years and are now most vulnerable to a tariff-driven selloff.

"When something goes wrong, people who are [in] very overpriced stocks get a shellacking," Kelly said. "Eventually, there's going to be a storm. But what I'm worried about is not that there may be a storm — it's that people won't be prepared for it."

Money managers can prepare for the worst by shifting into fixed income, which has struggled but offers appealing yields of 5%, and non-US stocks, Kelly said. And within US markets, he recommends getting defensive by adding exposure to sectors that hold up in tough markets, namely consumer staples, healthcare, and utilities.