SAN FRANCISCO (Reuters) - The specter of a trade war started by U.S. President Donald Trump rattled Wall Street on Thursday and exacerbated worries about inflation and the future of a nine-year bull market.
The S&P 500 slumped 1.33 percent after Trump said the United States would impose duties on imported steel and aluminum, making good on promises to aggressively challenge China and other countries he blames for lost manufacturing jobs.
On Wall Street, Trump’s announcement exacerbated already-brewing concerns about inflation, which could push the U.S. Federal Reserve to hit the brakes in coming months on an expanding U.S. economy and spell the end to record-breaking stock price gains.
“In an environment where people are a little bit on edge concerning future inflation, tariffs don’t exactly mollify those concerns,” warned Chuck Carlson, chief executive at Horizon Investment Services in Hammond, Indiana.
News of the tariffs drove the stocks of U.S. domestic steel and aluminum makers sharply higher, but the damage to stocks in other sectors was wide-ranging and illustrative of how broadly investors believe a trade conflict could damage the U.S. economy.
U.S. Treasury yields fell as some investors viewed debt as a safer bet than stocks, while the dollar fell to two-week lows against China’s yen currency.
About $323 billion evaporated from S&P 500 companies’ stock market value on Thursday. The stock market value of U.S. steel companies that would benefit from the tariffs rose by $2 billion. Money managers pointed to steel and other materials stocks as among the few likely to benefit from any potential quarrel with China, the European Union, Canada and other trade partners.
“Tariffs haven’t worked historically and they cause retaliation. This is sort of working your way into a trade war which is a drag on the economy,” warned Art Hogan, chief market strategist at B. Riley FBR in New York.
Apple (AAPL.O), which is intricately tied to China, dropped 1.75 percent. The largest U.S. company by market capitalization manufactures its iPhones in China and receives a fifth of its overall revenue from there.
General Motors, which might raise the prices of its automobiles to help offset higher steel prices resulting from tariffs, sank nearly 4 percent, while Ford Motor Co lost 3 percent.
“If the trend continued to more and more tariffs being put on, that would have the effect of dampening overall demand in this country, raising prices in this country, and would ultimately be a net drain on cash flow coming into this country through investment channels,” said Kevin Caron, senior portfolio manager at Washington Crossing Advisors in Florham Park, New Jersey.
Deep corporate tax cuts enacted this year have won Trump many fans on Wall Street and helped propel the market to record highs, with the S&P 500 soaring 19 percent since his inauguration 13 months ago.
“I don’t think a trade war is going to do anybody good anywhere,” said Peter Costa, president of Empire Executions in New York. “Anything that even smells like it’s not good is going to bring the market down quickly.”
Much of Wall Street’s optimism in recent months has rested on expectations that tax cuts and healthy economic growth would push corporate earnings sharply higher in 2018. Analysts on average expect S&P 500 earnings to expand 19 percent this year, according to Thomson Reuters I/B/E/S.
Federated Global Allocation fund portfolio manager Steve Chiavarone called Trump’s trade plan “frustrating and unfortunate.” Still, Chiavarone said he expects strong earnings expectations to keep supporting stock prices, unless the European Union and China retaliate seriously against the United States.
Reporting by Noel Randewich; additional reporting by Lewis Krauskopf, Chuck Mikolajczak, David Randall, and April Joyner in New York; Editing by Alden Bentley