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Stocks Slide as Evidence Mounts of Slowdown Fueled by Trade War Stocks Slide as Evidence Mounts of Slowdown Fueled by Trade War
(about 1 hour later)
Stocks slid on Wednesday, a second day of selling that has shattered a relatively calm period for Wall Street, as investors faced new evidence that the world’s industrial sector is weakening in the face of the trade war. For much of the last year, America’s trade war was the rest of the world’s problem.
The S&P 500 dropped 1.8 percent, its worst day since late August. Stocks in Europe tumbled. Even as growth slowed in China, Japan and Germany, the United States economy held up and stocks on Wall Street remained close to records.
The selling this week began after a report on manufacturing activity showed that factory output in the United States slowed in September to levels last seen at the end of the financial crisis a decade ago. The data was fresh indication that the trade conflict between Washington and Beijing is chipping away at the industrial base in the United States, after having already dented factories in China, Japan and Germany. Now, investors are facing evidence that tensions between Washington and Beijing are chipping away at America’s factories. That has sent stocks tumbling and raised the stakes for the next round of talks between the leaders of China and the United States, the world’s two largest economies.
Corporate reports on Wednesday, on auto sales and the airline sector, also contributed to the market’s dour mood. The S&P 500 slid on Wednesday for the second straight day, falling 1.8 percent in its worst drop since late August.
“There’s no question that the global economy is slowing and that’s beginning to show up in U.S. data,” said Scott Clemons, chief investment strategist at private bank Brown Brothers Harriman. Sectors of the market most exposed to the economy — energy, financial and industrial companies —  all fell sharply. Technology stocks that have been particularly sensitive to developments in the trade war slumped, as did shares of chemical companies and fertilizer manufacturers. Crude oil prices and yields on government bonds also dropped, reflecting concerns about growth.
The primary culprit for the economic slowdown is the trade war between the United States and China. On Tuesday, the World Trade Organization cut its forecast for growth in trade. Although both Washington and Beijing have taken measures to lower the tension between them, investors remain on edge, wary of the next downdraft, and eager to see a lasting breakthrough in the next round of talks between the two sides. The selling this week began on Tuesday, after a report showed that factory output in the United States in September had fallen to levels last seen at the end of the financial crisis a decade ago. The data was a fresh indication of the trade war’s creeping impact on the American economy.
“This is the markets unequivocally insisting that there be verifiable, material progress in next weeks trade talks between the U.S. and China,” said Julian Emanuel, chief equity and derivatives strategist at brokerage firm BTIG. Even though both Washington and Beijing have taken small measures to ease their tensions, investors remain wary of the next downdraft and eager to see a lasting breakthrough in the next round of talks. Representatives from China and the United States are expected to restart high-level negotiations in Washington late next week.
On Wednesday, industrial companies and materials stocks — a category that includes chemical companies and fertilizer manufacturers — suffered some of the steepest drops. “This is the markets unequivocally insisting that there be verifiable, material progress in next week’s trade talks,” said Julian Emanuel, chief equity and derivatives strategist at the brokerage firm BTIG.
Shares of airlines also fell sharply after Delta’s updated forecast on third-quarter earnings disappointed the market, and shares of automakers were down sharply after Toyota and Honda reported a steep decline in sales in the United States. Because it is less dependent on manufacturing, the United States is less exposed to trade wars than other large economies. But it is not immune.
Large technology companies weighed heavily on the market. Apple and Microsoft — the two largest companies in the S&P 500, by market value — both fell sharply. In the second quarter, business investment fell, with analysts, in part, blaming uncertainty related to the trade war.
Sudden outbreaks of economic panic have been a recurrent feature of the markets in the past year, part of a dynamic of worry and relief that has whipsawed investors repeatedly. “There’s no question that the global economy is slowing and that’s beginning to show up in U.S. data,” said Scott Clemons, chief investment strategist at the private bank Brown Brothers Harriman.
In December stocks plummeted 9 percent, before soaring almost 8 percent in January after the Federal Reserve indicated it would cut interest rates to offset potential economic damage from the trade fight. Similar swings took place in May and June. Economists now expect that economic growth will fall below 2 percent next year, according to estimates compiled by FactSet.
October’s decline stands out in part because trading was remarkably muted in September. But growing evidence of economic damage tied to the trade war has pushed the issue to the forefront of investors’ minds once again. And whether the United States can generate even that lower level of growth hinges on whether consumer spending — which accounts for about two-thirds of economic activity — remains strong.
While the United States is less exposed to trade wars than other large economies, it is not completely immune. Economists now expect that economic growth in the country will fall below 2 percent next year, according to estimates compiled by FactSet. On Friday, the Labor Department will report on the monthly pace of hiring, and economists expect that report to show unemployment remained near a 50-year low in September. That could help calm investors’ nerves.
And whether that United States can generate even that lower level of growth hinges on whether consumer spending — which accounts for about two-thirds of economic activity — remains strong. “Business confidence has eroded quite a bit due to trade tensions,” said Patrick Chovanec, chief strategist at the wealth management firm Silvercrest Asset Management. “But consumer confidence has not and it’s been supported mainly by a vibrant jobs market.”
On Friday, the Labor Department will report on the monthly pace of hiring in the United States, and economists expect that report to show unemployment remained near a 50-year low in September. That could help calm investors’ nerves. The fact that businesses have kept hiring, and that the Federal Reserve is cutting interest rates, have both helped stocks this year. Even after the recent decline the S&P 500 is up more than 15 percent in 2019.
“That’s more people with more jobs and more money,” said Mr. Clemons. “And that’s 68 percent of the economic equation.” But sudden outbreaks of economic alarm have been a recurrent feature of the markets in the past year, part of a dynamic of worry and relief that has whipsawed investors repeatedly.
In December stocks plummeted over fears of a potential recession, before soaring in January after the Federal Reserve indicated it would cut interest rates to offset economic damage from the trade fight. Similar swings took place in May and June.
President Trump, who has a close eye on the stock market and has in the past played up its gains as a report card on his presidency, attributed the decline to an impeachment inquiry by Democrats. “All of this impeachment nonsense, which is going nowhere, is driving the Stock Market, and your 401K’s, down,” he wrote on Twitter on Wednesday.
The stock market unrest wasn’t contained to Wall Street.
In Europe, where manufacturing accounts for a larger share of economic output, the selling on Wednesday was sharper than in the United States. Britain’s FTSE 100 dropped more than 3 percent, its worst decline this year, while Germany’s Dax index dropped 2.8 percent.In Europe, where manufacturing accounts for a larger share of economic output, the selling on Wednesday was sharper than in the United States. Britain’s FTSE 100 dropped more than 3 percent, its worst decline this year, while Germany’s Dax index dropped 2.8 percent.
Germany has become a point of concern for investors, with its factory orders dropping as Chinese companies, hit by tariffs on exports to the United States, purchase less German machinery.Germany has become a point of concern for investors, with its factory orders dropping as Chinese companies, hit by tariffs on exports to the United States, purchase less German machinery.
At the same time, Britain remains enmeshed in negotiations over Brexit and faces huge uncertainty over its future trading relationship with Europe. Prime Minister Boris Johnson is set to unveil a new proposal on Wednesday for the terms of leaving the European Union at a Conservative Party conference, but there is still a risk that Britain will leave the bloc at the end of the month without a deal. Stocks had weakened slightly, in Asia but not to the same extent experienced in Europe At the same time, Britain remains enmeshed in negotiations over Brexit and faces huge uncertainty over its future trading relationship with Europe. There is still a risk that Britain will leave the bloc at the end of the month without a deal.
President Trump, who has a close eye on the stock market and has in the past touted its gains as a report card on his presidency, blamed the decline on an impeachment inquiry by Democrats. “All of this impeachment nonsense, which is going nowhere, is driving the Stock Market, and your 401K’s, down,” he wrote on twitter on Wednesday.
But concerns about the economic outlook were apparent in other financial markets also. Yields on government bonds and crude oil prices, both of which are reactive to economic concerns, also fell.