Dow tumbles more than 700 points as trade war fears intensify

Adam Shell | USA TODAY

Show Caption Hide Caption What does a trade war look like? We explain The last time a trade war happened in the U.S., things didn't go well for the economy. Will history repeat itself as Trump puts a tariff on steel and aluminum? Here are the facts.

U.S. stocks sold off sharply Thursday, with the Dow tumbling more than 700 points amid growing fears of a trade fight between the U.S. and its trading partners after President Trump said he will impose billions of dollars in tariffs on Chinese imports.

The heavy selling on Wall Street was exacerbated by continued weakness in shares of Facebook as well as concerns about the impact of rising interest rates on the economy.

The Dow Jones industrial average closed down more than 724 points, or nearly 3%, to 23,958. It was the blue-chip average's fifth-worst daily point drop in history and worst point drop since Feb. 8, when it fell more than 1,000 points. After the big fall, the Dow is down 3.1% for the year and 9.99% from its January all-time high, which basically puts it back in correction territory, or a drop of 10%.

The tech-packed Nasdaq slid 2.4% and the broad Standard & Poor's 500 stock index dropped 2.5%.

Wall Street got confirmation from President Trump that the U.S. is aiming for tariffs on $60 billion of Chinese imports, a move that has increased worries of a global trade war and retaliation from Beijing. Under a memorandum signed at the White House, Trump ordered the U.S. trade representative to develop a list of specific tariffs within 15 days; that list would be subject to a period of public comment before they take effect.

Threat of a trade war topped the list of fears of money managers in a survey released Tuesday by Bank of America Merrill Lynch.

Growing uncertainty as to how the growing friction over trade will ultimately play out — and how bad it will get — is a major market concern.

"The biggest threat is retaliation and where it all ends," says Craig Erlam, senior market analyst at OANDA, a currency trading firm with offices in New York.

Trade wars are bad for the global economy, as they cause prices that consumers and businesses pay for goods and services to rise. A rise in inflationary pressures could prompt the U.S. central bank to speed up its pace of interest rate hikes, which could slow economic growth. Trade skirmishes can also hurt U.S. exports and corporate earnings.

The market losses were broad-based with 10 of the 11 main market industry groups finishing lower. Only the defensive utilities sector finished up. Companies that do a big chunk of business overseas were hit hard, with airplane maker Boeing and heavy-equipment maker Caterpillar both down more than 5%.

Wall Street was also watching shares of social media giant Facebook closely after CEO Mark Zuckerberg in media interviews focused on the company's data privacy controversy. He noted that Facebook had made mistakes and that he would consider appearing before Congress to address the breach. Facebook shares, which are down more than 14% from their Feb. 1 high, fell 2.7% Thursday.

The market sell-off follows Wednesday's decision by the Federal Reserve to boost its key interest rate by a quarter percentage point but keep its forecast for three hikes in 2018, not the four Wall Street had feared.

Still, investors appear to be balking at the Fed signaling that the pace of rate hikes could be quicker than anticipated in 2019 and beyond.

For now, investors are downplaying the odds of a broad global shift toward protectionism and a big fight between the U.S. and China.

"Neither China or the U.S. wants to engage in a trade war," says Rob Plaza, senior equity analyst at Key Private Bank in Cleveland. "It is a lose-lose situation for both parties."

Still, at this point, Wall Street is not buying into the narrative that a full-blown trade war is imminent, Plaza notes .

"Investors think it is basically a negotiating tactic" that the president is using to improve the country's trade deals, he says.

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