Trump's 'tariff man' talk spooks investors, sends stock markets plunging
U.S. yield curve inverts as pessimism about growth potential comes roaring back
Stock markets fell precipitously on Tuesday as weekend optimism that the U.S. and China could de-escalate their trade war fell by the wayside.
The Dow Jones Industrial Average fell more than three per cent, or 799 points, to 25,027. The broader S&P 500 fared even worse, losing 88 points to close just above 2,700. And the technology-heavy Nasdaq was worst of all, down almost four per cent, or 283 points, to 7158.
The TSX was comparatively better off, down only 1.3 per cent, or 211 points, to 15,063, as a rebound in oil prices "helped to break the fall of the Canadian markets a little bit," said Colin Cieszynski, chief market strategist at SIA Wealth Management.
Both the New York Stock Exchange and the Nasdaq will be closed on Wednesday for the funeral of former president George H.W. Bush, so U.S. investors will have to wait until Thursday if they want to alter their currently gloomy view.
"People were willing to pile in yesterday but today perhaps the bulls and bargain hunters were a little more reluctant to step in," Cieszynski said. "We'll see what happens when U.S. trading resumes on Thursday."
The causes of the dour mood were myriad, but they all boil down to fears that the economy is in for a bumpy ride.
"It's more concerns about China and Trump," Barry Schwartz, chief investment officer with Baskin Wealth Management, said in an interview. "I thought we had the truce but the market decided to get skeptical on it today."
'Something turned out to be nothing'
That gloom was a marked change from Monday, as U.S. markets had a mini rally after the weekend summit between U.S. President Donald Trump and Chinese President Xi Jinping agreed to what seemed like a ceasefire in their roiling trade war.
The U.S. administration on Monday claimed China had agreed to lower several tariffs on U.S. goods, but Chinese media outlets made no mention of such a concession. Then White House officials on Tuesday struggled to explain what — precisely — the two sides have actually agreed to do.
"The sense is that there's less and less agreement between the two sides about what actually took place," said Willie Delwiche, investment strategist at Baird. "There was a rally in the expectation that something had happened. The problem is that something turned out to be nothing."
"As soon as investors digested the information from the discussions, they focused on the uncertainties and lack of details," said Ryan Nauman, market strategist at Nevada-based Informa Financial Intelligence.
Those smouldering flames then had gasoline poured on them later in the day, when Trump made a series of statements on Twitter that reconfirmed he's as committed to trade barriers as ever.
....I am a Tariff Man. When people or countries come in to raid the great wealth of our Nation, I want them to pay for the privilege of doing so. It will always be the best way to max out our economic power. We are right now taking in $billions in Tariffs. MAKE AMERICA RICH AGAIN—@realDonaldTrump
"There was no news today," Schwartz said. "There was some stupid tweets but really no news of substance."
It didn't help the mood that the bond markets started making a sign that has a track record of predicting recessions in the past.
The yield curve on U.S. three-year government bonds versus five-year bonds inverted — meaning the rate for the former is now higher than the one for the latter. (Under normal circumstances, long-term debt has a higher yield than shorter-term debt, to reward investors for locking in their money for longer. For more on why inverted yields are so fearsome, read this story.)
Inverted yields suggest investors aren't feeling confident about the future, and there's a strong correlation between the appearance of an inversion and the U.S. economy going into a recession shortly thereafter.
"When short-term interest rates are higher than long-term, it definitely tells you people are worried about the economic outlook for the future," Schwartz said.
But he thinks the gloom was overblown. The global economy has been growing at a healthy clip for several years in a row now, and he sees no reason to think that won't continue into 2019. "But skepticism is winning the day," Schwartz said. "This is where the markets want to be for now."
With files from CBC's Meegan Read and Reuters