Dow dives as trade war angst boosts investor anxiety over growth, earnings

Adam Shell | USA TODAY

Show Caption Hide Caption EU enforces tariffs on $3.4 billion US goods The European Union is enforcing tariffs on $3.4 billion in US products as of Friday in retaliation to duties the Trump administration has put on European steel and aluminum. (June 22)

A top White House trade official downplayed reports that the Trump administration was making plans to block Chinese investments in American tech companies, comments that eased escalating trade tensions and helped U.S. stocks close well off their lows.

Confusion over the administration's China trade policy related to technology caused a sell-off that pushed the Dow Jones industrial average down nearly 500 points before it recovered and finished down 328 points, or 1.3 percent, at 24,253.

Investors began dumping stocks after trade fears were ratcheted up by reports that Trump planned to curb Chinese purchases of U.S. tech companies, as well as curtailing American technology sales to China, the latest salvo in a skirmish that Wall Street fears will morph into a full-blown trade war.

But in an afternoon interview on CNBC, Peter Navarro, a trade advisor to the president, said there "were no plans to impose investment restrictions" on China or any other countries.

Despite the comments, the Dow still fell for the ninth time in the past 10 sessions.

Investors who once downplayed the tit-for-tat trade dispute between the U.S. and its trade partners as a Trump negotiating ploy are now confronted with the reality that some of the tariffs are in effect, causing companies to change business plans and warn of weaker profits, says Kate Warne, chief market strategist at brokerage firm Edward Jones, based in St. Louis.

U.S. stocks sold off broadly, as large stocks in the Standard & Poor's 500 index fell 1.4 percent, shares of small companies in the Russell 2000 tumbled 1.7 percent and the technology packed Nasdaq slid 2.1 percent.

The most popular tech stocks – dubbed "FAANG" – which had held up amid the tariff tiff, got slammed. Facebook was down 2.7 percent, Amazon was off 3.1 percent, Apple slid 1.5 percent, Netflix plunged 6.5 percent and Google parent Alphabet was off 2.6 percent. The sell-off in that industry was over concerns that the Chinese computer network gear used by the U.S. tech giants could be the next group of products to be subject to U.S. tariffs, according to Panjiva Research.

Here's why Wall Street is worried:

Escalation of trade tiff

There appears to be no signs of either side in the trade dispute giving in. Trump is pushing ahead with further restrictions targeting Beijing, and China has repeatedly vowed retaliation, says Jim Paulsen, chief investment strategist at The Leuthold Group, a Minneapolis-based money management firm.

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Tariffs harm to businesses

The imposition of tariffs by the U.S. on imports from China and the European Union, and the retaliatory import taxes slapped on American-made products by these trading rivals, is starting to harm business activity.

"Some companies are now suggesting that the trade war is beginning to impact their operations," Paulsen says.

Earlier Monday, American motorcycle maker Harley-Davidson said it planned to shift production of U.S.-made motorcycles that it sells in the EU to overseas facilities. The reason: to offset the rising costs caused by EU import taxes that have increased from 6 percent to 31 percent. Harley-Davidson estimates that the higher tariffs have increased the cost of motorcycles exported from the U.S. to the EU by $2,200 per motorcycle, on average.

Last week, Daimler, the German-based automaker that manufactures many Mercedes-Benz vehicles in the U.S., was the first company to warn of lower profits due to higher tariffs. In response to Trump's decision to levy tariffs on $50 billion in Chinese goods, Beijing slapped tariffs on U.S. auto imports, which Daimler warns will result in Chinese customers buying fewer cars.

Hit to economic growth

Wall Street fears that economic growth is slowing around the globe as a result of the trade friction. Investors are bracing for lower GDP numbers when second-quarter growth numbers are reported by Europe, China, Japan and other countries.

"A trade war slows growth, raises prices and lowers productivity," says David Kotok, chief investment officer at Cumberland Advisors, a money-management firm in Sarasota, Florida. "Markets are worried about a worldwide growth slowdown because of a trade war."

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