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Why the stock market fell Tuesday

Why the stock market fell Tuesday


Why the stock market fell Tuesday


Here’s what a pair of tweets on trade can do.

The Dow Jones industrial average dropped more than 450 points on Tuesday and had its worst performance since Jan. 3. And the other two top gauges of U.S. stocks, the Standard & Poor’s 500 and the Nasdaq, notched their sharpest declines since March 22.

Major U.S. stock indexes fell sharply for a second straight day after President Trump threated a huge increase in tariffs on Chinese goods in two tweets over the weekend.

Investors, who previously hoped this week’s trade negotiations with China would lead to a resolution of trade differences between the U.S. and China, now questioned the progress of the talks following the surprise threat of new tariffs, which could take effect Friday.

“The Trump administration’s doubling down on the China threats has been a gut punch to bulls,” said Daniel Ives, managing director of equity research at Wedbush Securities. “Investors do not want to add risk going into trade talks this week given the shot across the bow from the administration.”

The sudden dip comes after a strong start for stocks in 2019. The longest bull market in U.S. history celebrated its 10th anniversary March 9. And after its sharp, two-day decline, the Dow is still up more than 11% since the start of the year. 

On Tuesday, the Dow Jones Industrial Average fell 473, or 1.79%, to end at 25,965 on Tuesday, while the broader S&P 500 index lost 48 points, or 1.65%, to finish at 2,884 on Tuesday. The tech-heavy Nasdaq dropped almost 160 points, or 1.96%, to finish at 7,964.

What happened to stocks?

The stock declines started Monday after President Donald Trump called for 25% tariffs on $200 billion of Chinese imports previously taxed at 10% and on another $325 billion on previously untaxed goods. The sell-off accelerated Tuesday after U.S. Trade Representative Robert Lighthizer and Treasury Secretary Mnuchin reiterated the hikes would start Friday.

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“We got that tweet and it’s ‘hold your horses,’ we’re not going to get that trade deal that many people thought was in the cards,” said Jerry Braakman, chief investment officer of First American Trust in Santa Ana, California.

Lighthizer and Mnuchin said the administration’s about-face comes after the Chinese began retreating on previous trade offers ahead of this week’s talks. The two countries were set to meet on Wednesday to discuss trade, but that has since been delayed until Thursday after Trump’s tariff threat.

“The biggest threat to this market is the U.S.-China trade issues,” Ives said. “If China and the U.S. dig in on trade, it’s time to put on the hard hat because the market could go down another 10% plus.”

The ongoing trade feud also has increased costs on goods for consumers and businesses.


A major comedown

This week is a role reversal from last, when the S&P 500 hit a fresh high on April 30 and the Nasdaq closed at a new peak on May 3.

Despite the two-day sell-off, stock investors are still winners year to date. The Dow remains up 11.3% for 2019; the S&P’s 15% higher; and the Nasdaq is up 20%.

That’s largely because of strong economic fundamentals, said John Lynch, chief investment strategist at LPL Financial. Stronger-than-expected earnings, a Federal Reserve that has been patient on interest rates, low inflation, impressive GDP and strong employment numbers have boosted stocks. Those forces have helped the market stay mostly on an upward trend since the beginning of the year.

“Recognize that this is a pullback, not a correction. All five of those fundamentals remain favorable in our opinion,” Lynch said. “Don’t let moves like this alter your long-term allocations. That’s how investors make mistakes.”



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