The market’s most sophisticated investors are bracing for a market meltdown.

One third of respondents in Bank of America Merrill Lynch’s May Global Fund Manager Survey, compiled May 3-9, have “taken out protection” to hedge against a steep fall in the stock market. This is the highest percentage of respondents in the survey’s history.

Why? Worries about a trade war — that remains fund managers’ biggest tail risk for the markets. And for good reason.

The 3 Cs

The current market rout started May 6, the day after President Trump referenced tariff increases on imports from China in a tweet. Those tariff increases began on May 10 and by May 13, the S&P 500 (^GSPC) closed down 4.8% from its 2019 intraday high of 2,954 reached on May 1. What a difference two weeks make.

“[Fund Manager Survey] investors are well-hedged but not positioned for a breakdown in trade talks” said Michael Hartnett, chief investment strategist. “Investors see little reason to ‘buy in May’ unless the 3Cs – credit, the consumer, and China – quickly surprise to the upside.”

While stocks have slumped over the past week, the S&P 500 is still up 12.2% since the start of the year.

“Financial markets have reacted to the news in typical risk-off fashion, but initial market moves have so far been relatively modest,” wrote Barclays analysts, led by chief U.S. economist Michael Gapen, in a note to clients.

The market volatility isn’t prompting Barclays to change its outlook on the Fed, even though market participants have been increasingly pricing in high probabilities of a Fed rate cut towards the end of 2019.

“We see the Fed as on hold through 2020 – and believe further deterioration in financial market conditions is needed before the Fed would take pre-emptive action,” Barclays wrote.

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Scott Gamm is a reporter at Yahoo Finance. Follow him on Twitter @ScottGamm.

More from Scott:

• Billionaire Ken Fisher: Why the stock market likely has more room to run

• Warren Buffett: 'Something different' is happening in the economy right now

• The market is starting to overreact to very specific economic data points

• 2019 may be the year of tariffs against European auto imports

• Citi downgrades U.S. stocks

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