Stocks are getting hammered Wednesday as trade tensions between the United States and China reached a boiling point.
The Dow tumbled as much as 500 points, or about 2%, at the open as wary investors sold off industrial giants with heavy exposure to China. The Nasdaq and the S&P 500 each lost 1.4%.
“It is in nobody’s best interest for the United States and China to engage in a trade war,” said Sam Stovall, chief investment strategist at CFRA Research.
The Chinese Ministry of Commerce said Wednesday that plans to impose a 25% tariff on $50 billion worth of US exports, including planes, cars, soybeans and chemicals.
China’s planned move is in retaliation to the Trump administration announcing Tuesday that it would impose tariffs on about 1,300 Chinese goods worth about $50 billion annually.
The tariffs will not go into effect immediately, leaving the door open for the two countries to negotiate. The Trump administration said it will hold a public hearing for US businesses about its plans next month.
Boeing, General Motors, Ford and Caterpillar all dropped sharply. Tech companies, including Advanced Micro Devices, also dropped.
US oil futures dipped 1.2% to trade at $62.28 per barrel. Soybeans, a major US agricultural export to China, also fell 4%.
“If protecting US intellectual property is the ultimate goal here, I’m not sure how destroying shareholder wealth, damaging CEO confidence and making the American farmer the main sacrificial lamb here after [six] years of pain on the farm is going to get us there,” Peter Boockvar, chief investment officer at Bleakley Advisory Group, wrote in a note Wednesday.
Investors sought safety in gold, which gained 1%, and US Treasury bonds.
The yield on the 10-year US Treasury note fell to 2.76% as investor demand for the steady returns of bonds shot up their prices. Yields move opposite to prices.
Analysts are weighing whether the tit-for-tat moves signal that a full-blown trade war between the two countries has arrived.
“Traders are saying ‘I’m going to sell first and ask questions later,'” Stovall said. “From a negotiating perspective, both sides are jockeying for position.”
The VIX, a measure of market volatility, spiked 12%. CNNMoney’s Fear & Greed Index flashed “extreme fear.”
Stovall noted that President Trump’s “modus operandi” was to take a hard line early on in negotiations and adjust if the other side made concessions.
“It is still uncertain how this will play out,” Julian Evans-Pritchard, an economist at Capital Economics, wrote in a research note Wednesday.
“China’s response could embolden Trump to push for broader US tariffs, escalating trade tensions further. Equally likely, however, is that there will be some compromise that allows both sides to row back, or at the very least, water down the proposed tariffs,” he said.
Despite trade war fears, the economic backdrop remained bright and corporate earnings are still poised to grow.
“The market is going through a self-writing process by working off the excesses of investor enthusiasm. The fundamentals have not changed,” Stovall said.
