U.S. stocks tumbled their lowest levels since November amid fears of a U.S.-China trade war and concerns that higher interest rates could put the brakes on growth.
The Dow Jones Industrial Average declined 423.69 points, or 1.8 percent, to 23,533.20 on Friday. That followed a steep decline on Thursday, and pushes the Dow into correction territory, which is a decline of more than 10 percent from its 52-week high. The S&P 500 index slumped 2 percent on Friday, while the tech-heavy Nasdaq Composite index declined 2.4 percent.
Worries about a trade war sent stocks into a tailspin on Thursday -- with the Dow dropping more than 700 points -- after President Donald Trump announced $50 billion in new tariffs on Chinese goods, a move experts fear could spark further retaliatory trade measures by Beijing. Investors have become anxious about rising trade tensions after the administration announced tariffs on imported steel and aluminum earlier this year.
"The potential for further escalation remains in place especially given the likelihood of more US trade sanctions from the increasingly protectionist administration," Mitul Kotecha, senior emerging markets strategist at TD Securities, wrote in a research report. "In this respect, risk appetite is unlikely to improve significantly and markets will remain nervous in the weeks ahead, keeping volatility elevated."
Investors are also concerned that the Federal Reserve may hike interest rates faster than expected if U.S. economic growth continues to firm. The central bank on Wednesday raised rates a quarter point and forecast that unemployment could fall below 4 percent by year-end.
The planned U.S. sanctions include tariffs on $48 billion worth of Chinese imports as well as restrictions on Chinese investments. Trump said he was acting in response to theft of American technology.
The U.S. Trade Representative identified 1,300 product lines as, including aerospace, information and communication technology, and machinery. A more complete list is due soon, to be followed by a 30-day comment period.
Concern that trade conflicts could wreak havoc on the world economy deepened as China responded to Trump's recent tariff hikes on steel and aluminum by warning it could order higher import duties on U.S. goods including pork, apples and steel pipe.
"If the tariffs go ahead as planned, then we believe China will retaliate. It is impossible to imagine that they cannot. And then we expect the U.S. to retaliate further," said Rob Carnell, ING's chief Asia economist. "This can turn ugly on a global scale very quickly."
China's Commerce Ministry urged Washington to negotiate a settlement, saying tariffs undermine the global trading system.
"Everbody's pushing each other around to do some negotiating," said David Collins, chief operations officer at CMC China Manufacturing Consultants, which advises companies on setting up factories in China. "Trump is negotiating. He's pushing back on the Chinese, and the Chinese will push back."
Peter Donisanu, an investment strategy analyst for the Wells Fargo Investment Institute, said the risk of a damaging trade war is still low because the Trump administration is targeting specific goods that aren't central to China's economy. That could change if it puts tariffs on products like electronics or appliances imported from China.
"If the Trump administration really wanted to hurt China and start a trade war, then they would go after those larger sectors," he said.
The risk of a U.S-China trade war is a regional concern, given the myriad supply chains and other ties across Asia. For example, South Korea's largest trading partner is China. The U.S. is its second biggest.
"I'm worried that it would affect the national economy," said S. E. Kim, an employee at a construction company in Seoul. "If the U.S. imposes tariffs on China like that, I think there would be some damage on us in the long term as well."
Concern over higher U.S. tariffs on steel and aluminum eased somewhat when the Trump administration said some countries will be exempt. U.S. Trade Representative Robert Lighthizer said Thursday that the tariffs won't apply to the European Union, Canada, Mexico, Argentina, Brazil and Australia.
Japan's trade minister described the U.S. decision not to exclude Japanese exports as "extremely regrettable."
"We will continue our effort patiently to persuade the U.S. to remove Japan from the list," Japanese Minister of Economy, Trade and Industry Hiroshige Seko told reporters.
A traditional "safe haven" from risk, the Japanese yen touched a 17-month high against the U.S. dollar in response to the jitters over trade.