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Investing.com - More stock market volatility could be coming as investors contend with a wave of uncertainty around trade and U.S. fiscal policy, according to strategists at UBS.

Equity markets have been roiled in recent weeks, with traders attempting to keep up with rapid shifts in an aggressive tariff agenda from U.S. President Donald Trump that is looking to upend the longstanding global trade order.

Shares have shown signs of recovery from an early April swoon following the announcement of Trump’s elevated "reciprocal" tariffs on friends and foes alike, with the benchmark S&P 500 notching a six-session winning streak which only came to an end on Tuesday.

In a note to clients, analysts at UBS said this was an indication that a Moody’s downgrade of its U.S. credit rating late last week did not come as a "surprise" to investors.

Sentiment has been bolstered by hopes that Trump’s tariffs may not be as sweeping as initially feared, particularly after the U.S. and China announced last week an agreement to pause and lower their tit-for-tat levies. Trump also previously delayed the reciprocal tariffs on most countries, arguing that it would grant U.S. officials more time to negotiate individual trade deals with dozens of countries.

Still, even after the postponements, universal 10% U.S. tariffs and other levies on items like steel, aluminum and auto parts remain in effect.

But the UBS analysts led by Mark Haefele said markets now want to see evidence that the U.S. is close to forging more deals prior to the expiry of the reciprocal tariff delay in July. The trade truce with China is also set to end in August.

"Even after the recent de-escalation in trade tensions and ongoing negotiations, the outlook for Trump’s tariff policy remains uncertain," they wrote.

Their base case is that the U.S. effective tariff rate will eventually hover around 15%, which would be substantially higher than the 2.5% rate before Trump’s return to the White House in January.

Markets are also focused on a "worsening U.S. fiscal outlook", the UBS analysts said. On Tuesday, Trump went to Capitol Hill to persuade Republican lawmakers to pass his massive budget bill, which some analysts have estimated could add between $3 trillion to $5 trillion to the U.S. government’s $36.2 trillion debt load.

Large tax cuts proposed by Trump could add to the supply of U.S. Treasury debt, exerting pressure on the bond market, the analysts said.

Despite these potential headwinds from trade and tax policy, the brokerage does not anticipate the U.S. economy will slide into a recession this year. The Federal Reserve, in turn, is likely to hold off on cutting interest rates in the near term, the analysts added.

They recommended "staying" with investments and adopting strategises to "manage volatility", projecting that the S&P 500 will edge higher over the next 12 months and the 10-year Treasury yield -- which tends to move inversely to prices -- will fall.

"We believe phasing into the stock market can be an effective way to position for medium- and longer-term equity gains while managing timing risks, and capital preservation strategies can help navigate near-term risks of stock declines," the analysts wrote.

"Investors should also consider quality bonds, gold, and hedge funds to ensure portfolio diversification."

This content was originally published on http://Investing.com