Stocks fell on Friday, capping off their worst week of 2019 amid renewed investor fears about a trade dispute between the U.S. and China.
The S&P 500, which had hit a record high in late July, slid for a fifth straight day, while the Dow also declined. The Nasdaq, which includes a number of big companies with commercial ties to China, took a particular beating — the technology-heavy index sank 107 points, or 1.3%, to close at 8,004.
Apple shares, Nasdaq's biggest component, lost more than $40 billion in market value after President Donald Trump took to Twitter on Thursday and threatened to slap a 10% tariff on $300 billion in goods the U.S. buys from China by Sept. 1 if trade talks between the countries fail to make progress. Those levies would mostly hit consumer goods, including the iPhone.
"President Trump's tariff announcement is an important escalation as it is the first major foray into consumer tariffs," said Aditya Bhave, global economist with Bank of America Merrill Lynch, in a report, adding that Mr. Trump "has implemented every measure against China that he has threatened, albeit sometimes after a delay."
China struck back and said Friday it will take "necessary countermeasures" if the Trump administration follows through with the new tariffs. The U.S. already has imposed a 25% on other Chinese imports.
Investors play defense
The re-escalation in tensions between the world's largest economies is raising worries about a global recession. So investors are playing defense by selling stocks and buying gold. They're also raising their expectations that the Federal Reserve will be forced to cut interest rates several times to cushion the trade war's blow.
Communications services, consumer discretionary and health care stocks also bore a big share of the losses. Investors shifted money into bonds and stocks traditionally seen as less risky: real estate and utilities.
The Labor Department's monthly jobs report, released Friday, is usually a market-moving event. But it hewed close to economists' expectations, showing a slowdown in hiring last month, and analysts said it was overshadowed by worries about trade and what the Fed could do about it.
Fed to the rescue?
The Fed has already cut interest rates once, doing so onin more than a decade. Chairman Jerome Powell cited "trade policy uncertainty" as a major reason for it in a press conference following the announcement. But he stopped short of promising a long cycle of rate cuts, which left investors disappointed and Trump tweeting that "as usual, Powell let us down."
The next day came Trump's tweet on tariffs, and investors now say there's a 98% probability that the Fed will cut rates again at its next meeting in September. That's up from a roughly 50% probability Wednesday afternoon.
Traders see low rates as steroids for stocks and other risky investments because they make bonds less attractive in comparison. By making borrowing cheaper, low rates can also help goose the economy.
But the Fed has less ammunition than in the past to cut rates because they're already low following years of nearly zero interest rates to get the economy going. The federal funds rate sits at a range of 2% to 2.25%, compared with the 5.25% perch it sat at before the Great Recession.
The latest round of announced tariffs, which would go into effect Sept. 1, more directly affect U.S. consumers shopping at Walmart or Target. If Trump ramps them up to 25% and keeps them there for four to six months, Morgan Stanley economists say they would expect a recession within nine months.
The concerns about the trade war and Fed have also blotted out what's been a better-than-expected earnings reporting season. Roughly three quarters of S&P 500 companies have updated investors on how much profit they made from April through June, and earnings for S&P 500 companies are on pace for a drop of 1% from a year ago. While weak, that's still better than the nearly 3% drop that analysts were earlier forecasting, according to FactSet.