The three words that best describe December 2018 stock market returns are as follows: “Stink, stank, stunk.” Will we get a reprise this month?

Conditions are in place for a Santa Claus Rally, as consumers show a willingness to spend. But trade war and international tensions could spoil the holiday.

You should brace your portfolio for a possible repeat of last December’s carnage. Below, I’ll show you the best places to invest under current conditions.

The escalating trade war is the major culprit for the sudden anxiety on Wall Street. It’s not just the U.S. versus China. The entire globe has descended into a trade war. This week, the White House slapped new steel and aluminum tariffs against Brazil and Argentina. No one saw that coming.

Even France has been dragged into the fight. France’s finance minister Monday vowed a “strong European riposte” if Trump follows through on his unexpected proposal to slap tariffs of up to 100% (that’s not a typo) on French cheese, Champagne, handbags and other luxury products worth up to $2.4 billion.

Trump’s move is in retaliation for a French digital tax on Silicon Valley technology giants, including Amazon (NSDQ: AMZN), Alphabet (NSDQ: GOOGL), and Facebook (NSDQ: FB).

British Prime Minister Boris Johnson said Tuesday that his government looked favorably on digital taxes and would press ahead with them, putting Johnson at odds with his ally Trump.

The flare-up in trade tensions with Europe created a fraught backdrop for President Trump’s meeting in London on Tuesday with French President Emmanuel Macron, in the run-up to this week’s NATO gathering. The two leaders clashed over foreign policy and tariffs.

Reports surfaced Wednesday that the U.S. and China are actually moving closer to a trade deal, despite the hostile rhetoric. But don’t get whipsawed by trade war headlines. Officialdom’s blather about “progress” is designed to keep investors from panicking.

Here’s the long-term trend to keep in mind: the U.S. has transitioned from free trade champion to a global leader in protectionism. And existing tariffs aren’t easily rescinded (see chart).

America is at loggerheads with the entire world, which puts the bull market at risk.

Read This Story: Trade Tensions Escalate, Slam Stocks

The spike in volatility this week is filling Wall Street with dread that December this year will resemble last year’s rout.

In 2018, the Dow Jones Industrial Average and the S&P 500 recorded their worst December performance since 1931. For the fourth quarter of 2018, the S&P 500 and Dow plunged 13.9% and 11.8%, respectively. The tech-heavy NASDAQ plunged 17.5%.

The three major U.S. stock indices concluded a volatile 2018 with their worst yearly performances since the great financial crisis of 2008. The S&P 500, the Dow, and the NASDAQ finished the year with losses of 6.2%, 5.6%, and 3.9%, respectively.

How to prepare for a rough December…

To prepare for possibly bad times ahead, you should pare back your growth stock holdings and elevate cash levels. Pocket at least partial gains from your biggest winners.

Over the past several months, certain defensive sectors, notably utilities and real estate, have outperformed the S&P 500. Sectors vulnerable to trade sanctions, such as industrials, have underperformed. As the trade war drags on, export-dependent companies with greater overseas exposure will continue to get hit the worst.

Utilities stocks are appealing now. Protected from competitors, utilities can become entrenched as a dominant economic force in an entire community. Everyone needs heat and power, regardless of economic cycles. That helps make utilities recession-resistant. For our “dividend map” of high-yielding (but safe) utilities stocks, click here.

Another smart strategy is to tap into unstoppable “mega-trends” that will unfold regardless of public policy fights, changing political winds, or economic cycles. One such trend is the global roll-out of 5G, the next generation of wireless technology.

The companies involved in developing and deploying 5G will richly reward investors who act early. Want details on how to profit from 5G? Click here now for our latest 5G report.

You should also gravitate toward real estate. As with utilities, real estate stocks are recession-resistant plays because they fall under the purview of essential needs. There’s a finite amount of space on earth and human beings will always need land.

There’s an under-the-radar investment opportunity in real estate right now that most investors don’t know about. Last year an obscure loophole allowed a handful of regular Americans to take back over $6.6 billion of the mortgage payments they made. If you want to join in the profits, click here to get started.

You should also increase your exposure to small-capitalization stocks. The definition of small cap varies, but it’s generally a company with a market valuation of between $300 million and $2 billion.

Small caps have been on a tear. Over the past three months, the Russell 2000 Index (RUT) has risen 7.9% compared to 5.3% for the S&P 500.

One way to protect your portfolio from geopolitical risk is to buy high quality small-cap stocks, especially in sectors that benefit during the late stage of economic recovery, e.g. consumer staples, health care, and utilities.

Small caps are insulated from concerns about global growth, because they tend to get most of their revenue domestically. Trade conflict and increasing instability in emerging markets have driven investors to smaller stocks, which have less exposure to these overseas hazards.

There’s still a chance that the broader stock market will continue rising this month. Economic growth remains on track, unemployment is under control, wages are rising, interest rates are low, and earnings in the third quarter came in stronger than expected. Consumer confidence is high and retail sales are robust. This year’s Black Friday and Cyber Monday were both huge successes.

According to the fundamentals, we should enjoy a Santa Claus Rally this month. Unless politicians decide to play Grinch.

Questions or comments? Drop me a line: mailbag@investingdaily.com

John Persinos is the managing editor of Investing Daily.