Dow finishes with weekly loss as Trump talks trade war

Paul Davidson | USA TODAY

Show Caption Hide Caption Wall Street drops over 1 percent The S&P 500 fell for a third straight day after President Donald Trump said the U.S. would slap tariffs on steel and aluminum. As Fred Katayama reports, that sparked fears of higher prices and a trade war.

The Dow turned in its worst weekly loss since early February as the specter of a trade war combined with fears of rising interest rates to spook investors.

The Dow Jones industrial average fell 772 points, or 3%, for the week to close at 24,538. The index is now down 0.7% for the year but still up 16.8% over the past 12 months. .

The index pared some of its losses Friday, closing down 71 points. But that followed a sharp drop early in the week triggered by Federal Reserve Chairman Jerome Powell's Congressional testimony that a strengthening economy and inflation could prompt faster interest rate hikes. Higher rates make bonds relatively more attractive compared to riskier stocks.

Inflation fears were further stoked Thursday when President Trump said he would slap a 25% tariff on imported steel and 10% on imported aluminum. The president showed no signs of backing off Friday, tweeting that “trade wars are good” and “easy to win.”

"We will continue to see volatility for coming months and the rest of this year," said Richard Guerrini, CEO of PNC Investments. But he added that would provide buying opportunities for investors. He said market losses likely shrank on Friday after investors realized the effect of tariffs on inflation broadly would not be as dire as it had first appeared.

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The planned tariffs -- aimed at countering the dumping of cheap, imported steel and aluminum in the U.S. by China and other countries -- are sparking fears of rising product costs in the U.S., and retaliation by other countries.

If the Trump administration makes good on its threats, “This is just a piece of what we would see” in markets as investors fret over widening counter-tariffs by other countries that eat into corporate earnings, said Brad McMillan, chief investment officer of Commonwealth Financial Network. “It could get worse.”

Standard & Poor's 500 companies derive about 43% of their sales from foreign countries.

On the other hand, Trump has threatened tough action against countries like China before then retreated, acknowledging that the bluster was designed to prod that country’s leaders to negotiate. That could happen again.

“This could all pass away, particularly as the rapid market response shows very clearly the potential costs,” McMillan said. “It is too early to be overly concerned.”

Markets also could calm down if other countries decide to take legal steps through the World Trade Organization instead of imposing tariffs, leading to negotiations.

Tariffs could spark higher inflation, spurring the Fed to raise interest rates faster. That could dampen borrowing and economic activity, and drive investments from stocks to fixed income assets, such as bonds.

Such taxes on imported products would force automakers and other U.S. manufacturers to charge higher prices or accept lower profit margins.

Yet steel and aluminum makers cheered the prospect of tariffs, saying businesses have been hammered and thousands of jobs have been lost as other nations dumped cheap products in the US.