The Dow tumbled more than 600 points in Monday afternoon trading after China planned to hike tariffs on U.S. goods, signaling an escalation in the trade war between the two nations.
China said Monday that it plans to increase duties on $60 billion of goods it imports from the U.S., largely agricultural products, starting June 1 in a retaliatory measure against higher tariffs imposed by the White House last week.
The Dow Jones Industrial Average and Standard & Poor’s 500 index, key gauges of the U.S. stock market, each fell more than 2% as investors sold trade-sensitive shares. Technology stocks led the way lower, with digital storage companies and chipmakers among the big decliners. Heavy equipment makers Deere and Caterpillar drove losses in the industrial sector.
The world’s largest economies, the U.S. and China, had seemed on track to resolve the ongoing trade dispute that has raised prices for consumers and pinched corporate profit margins. Investor confidence that the two sides were close to a resolution had helped push the market to its best yearly start in decades.
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Those hopes are now being dashed and replaced by concerns that the trade war could crimp what is otherwise a mostly healthy economy. Analysts have warned that failed trade talks and the deterioration in relations will put a dent in the U.S. and China’s economic prospects.
“The larger issue with the tariffs isn’t the specific amounts of tariffs at any given time, but the uncertainty that’s surrounding these tariffs and the ‘what’s-next?’ of an escalating trade war,” said Willie Delwiche, investment strategist at Baird. “That weighs on the global economy and could then weigh on the U.S. economy.”
The Dow dove 544 points, or 2.1%, to 25,398 as of 3:08 p.m. Eastern Time. Earlier, it was down 719 points. Boeing and Caterpillar fell the most in the Dow. Both companies get a significant amount of revenue from China and stand to lose heavily if the trade war drags on. Boeing slid 4.2% and Caterpillar was 4.4% lower.
The broader S&P 500 index fell 2.1%. The benchmark index is coming off its worst week since January, though it’s still up sharply for the year. The Nasdaq, which is heavily weighted with technology stocks, slid 2.9%, on track for its biggest daily loss of the year.
Technology stocks were bearing the heaviest losses. Apple fell 5% and Cisco slid 3.4%. Chipmakers and other technology companies have warned that uncertainty over the trade war’s outcome is prompting a slowdown in orders.
Safe-play holdings were the only winners as traders sought to reduce their exposure to risk. Utilities were the only sector to rise on the stock market, and prices for U.S. government bonds, which are considered ultra-safe investments, rose sharply, sending yields lower. The yield on the 10-year Treasury fell to 2.40% from 2.45% late Friday.
Trade talks between the U.S. and China concluded Friday with no agreement and with the U.S. increasing import tariffs on $200 billion of Chinese goods to 25% from 10%. Officials also said they were preparing to expand tariffs to cover another $300 billion of goods.
Analysts have said investors should prepare for a more volatile stock market while the trade dispute deepens. Many are still confident that both sides will eventually reach a deal.
“Since we see a trade accord being reached in the not-too-distant future, we don’t expect the market to endure more than a short-lived spate of indigestion,” said Sam Stovall, chief investment strategist at CFRA.
The deteriorating trade negotiations follow what has been a mostly calm period of trading where solid economic data and corporate earnings helped push the market steadily higher. The S&P 500 is still up 12.5% of the year with technology stocks blowing away rest of the market with 18.8% gains.
Investors have so far made it through the bulk of first-quarter corporate earnings reports in decent shape. Earlier in the year they had expected earnings to severely contract, but results so far show less than a 1% drop in profit.
The escalating trade war threatens to spoil an expected earnings recovery in the second half, however.
“Investors are increasingly worried an anticipated second-half profit rebound may now evaporate as President (Donald) Trump’s threat to tariff the remaining $325 billion in Chinese imports would disproportionately target consumer products like iPhones, thereby posing a greater threat to the consumption-driven US economy,” said Alec Young, managing director of global markets research at FTSE Russell.
Contributing: Janna Herron, USA TODAY in New York.