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Fresh Trade Threats Drag on U.S. Stocks

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07/11/2018 | 10:51pm CEST

By Ben St. Clair and Danielle Chemtob

U.S. stocks slumped Wednesday as concerns over escalating trade tensions and falling oil prices outweighed optimism about the coming earnings season.

The Trump administration said late Tuesday it would assess 10% tariffs on an additional $200 billion in Chinese goods. The tariffs, which wouldn't come into effect for at least two months, cover a variety of Chinese products including consumer goods.

China called the move "totally unacceptable" in a statement attributed to an unnamed ministry spokesman and vowed to roll out unspecified countermeasures.

The Dow Jones Industrial Average lost 219 points, or 0.9%, to 24700, while the S&P 500 declined 0.7% and the technology-heavy Nasdaq Composite dropped 0.5%. The indexes snapped a four-session winning streak but remain modestly higher for the week.

"Every time a trade headline comes out, it seems to suck the oxygen away from everything else the market is paying attention to," said Jeff Mills, co-chief investment strategist for PNC Financial Services Group.

The energy sector in the S&P 500 fell 2.1% as oil prices suffered their steepest decline in more than a year. U.S. crude dropped 5% to $70.38 a barrel after Libya indicated it would resume export activities at its eastern ports. Shares of Exxon Mobil slipped 1.3%, and Chevron dropped 3.2%.

Despite the sharp declines, many investors remain bullish on the energy sector, which has seen the largest increase in earnings estimates for the second quarter, according to FactSet.

"If oil can stay in range of high $60s to mid $70s, it's kind of a sweet spot for the economy in general," Mr. Mills said.

Commodity prices were also pressured by a strengthening dollar; the WSJ Dollar Index, which measures the U.S. currency against 16 others, added 0.8%.

Copper futures declined 3.4% to around one-year lows. The metal, which is seen by many analysts as a barometer for global economic health, has been hit especially hard amid the growing trade worries.

Ten of the 11 sectors in the S&P 500 ended lower, with materials and industrials stocks the biggest decliners after energy shares. Those sectors declined 1.7% and 1.6%, respectively. The utilities sector, which is considered a defensive play because of its hefty dividend payments, was the only group trading higher, with a gain of 0.9%.

"More defensive sectors remain ignored even though there's this underlying fear of, oh it's late in the market cycle," said Craig Birk, executive vice president of portfolio management at Personal Capital.

Caterpillar was among the biggest losers in the Dow industrials, falling 3.2%. The heavy-equipment manufacturer has said tariffs would increase its material costs.

U.S. stocks have generally been more resilient to the trade tensions than their Chinese peers. In the past, they have rebounded relatively quickly from trade-related pullbacks, partly because the fallout on corporate earnings is expected to be fairly limited. The Shanghai Composite, meanwhile, has declined 16% this year, versus a 4.5% gain for the S&P 500, and the Chinese benchmark slumped 1.8% on Wednesday.

Some investors, though, are worried that product-specific tariffs could lead to price increases for U.S. consumers and put pressure on the Federal Reserve to raise interest rates.

And the latest round of economic data showed firming inflation, as a gauge of U.S. business prices rose in June. The producer-price index, a measure of the prices businesses receive for their goods and services, rose 3.4% from the year before, the largest annual increase since November 2011, the Labor Department said Wednesday.

"More broadly, when we think about what it is that is going to sort of put an end to this market cycle, it's actually more likely going to be the Fed than it is a global trade war," said Emily Roland, head of capital markets research at John Hancock Investments.

The yield on the 10-year U.S. Treasury note fell to 2.844% from 2.873% on Tuesday. Yields decline as prices rise.

Market participants had been tentatively optimistic on trade earlier in the week, driving stocks higher as they looked toward what are expected to be positive second-quarter earnings reports.

Analysts expect earnings from S&P 500 companies to register growth of roughly 20% for the second quarter from the year-earlier period, according to FactSet. Major U.S. banks, including JPMorgan Chase, will announce their results Friday.

"Investors are definitely going to be more focused on fundamentals as we head into earnings season," Ms. Roland said. "The key challenge is going to be deciphering whether any mentions of trade or tariffs are excuses for potentially poor business results, or are they actually a real element that's weighing on equities."

Jason Browne, chief investment strategist at San Francisco-based FundX investment group, said the tariffs could be a headwind for profit margins, which are already being challenged by a tighter labor market, rising commodity prices and higher interest rates.

"I wouldn't necessarily say we're expecting an imminent pullback, but you start to ask the question, why not?" he said.

Stocks mentioned in the article
ChangeLast1st jan.
CHINA-SHANGHAI COMP 1.82% 2699.95 End-of-day quote.-18.53%
DJ INDUSTRIAL 0.71% 26246.96 Delayed Quote.6.18%
NASDAQ 100 0.80% 7494.3994 Delayed Quote.16.23%
NASDAQ COMP. 0.76% 7956.1068 Delayed Quote.14.38%
S&P 500 0.54% 2904.31 Real-time Quote.8.05%
US DOLLAR INDEX 0.15% 94.64 End-of-day quote.3.03%
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