China Syndrome: Stocks Melt Down as Trade Tensions Flare
The U.S. and China engaged in a tit-for-tat exchange Friday that further inflamed fears of a trade war. The Dow Jones Industrial Average, S&P 500 and Nasdaq all plunged today, in volatile trading. The three indices posted losses for the week.
Technology stocks continued to suffer, amid the worsening Cambridge Analytica scandal. Facebook (NSDQ: FB) sharply fell again today, losing 3.34%.
After a prolonged “Trump rally” that seemed immune to bad news, we’re now in the midst of a “Trump slump.” Headline risk is proving a greater determinant than usual in the markets. U.S. and global stock markets have dipped into correction territory, as the world braces for trade war. The CBOE Volatility Index (VIX) jumped 9.38% today, its highest level since March 2.
Special Counsel Robert Mueller’s investigation into Russian election meddling, the mind-boggling rate of personnel turnover in the White House, rising interest rates, stirring inflation — all of these factors weigh on investors. But the top concern, by far, is the brewing battle between the U.S. and China over trade.
The world’s two largest economies are edging closer to a trade war. The consequences could be disastrous for corporations, national economies and investors.
For the first time since Donald Trump’s surprise victory in November 2016, the financial community is worried about the occupant in the Oval Office. At first, Wall Street welcomed his pro-business agenda and vow to cut taxes and regulations. These goals are straight from the traditional GOP playbook. But then along came tariffs. The recent wave of protectionist measures has crushed equities. The Dow today closed at its lowest level since November 2017.
Enter the dragon…
President Donald Trump on Thursday launched tariffs and penalties on up to $60 billion in Chinese goods. These measures are in addition to recently imposed tariffs on steel, aluminum, solar components, and washing machines.
The White House declared temporary exemptions from the tariffs for the European Union, Canada, Mexico, and South Korea, making it clear that the U.S. is singling out China as the target.
China struck a defiant tone on Friday. The Chinese commerce ministry asserted in a statement released today:
“China doesn’t hope to be in a trade war but is not afraid of engaging in one. China hopes the United States will pull back from the brink, make prudent decisions, and avoid dragging bilateral trade relations to a dangerous place.”
Trump’s presidential memorandum on Thursday provides for a 30-day consultation period that only starts once a list of Chinese goods is published. Will Trump follow his usual pattern of talking tough at first and then relenting? Trump has a history of either moderating or dropping his initial stands. The consultation period creates a window to address Trump’s allegations of China’s intellectual property theft and mandated technology offsets.
Trump says the planned tariffs are in response to China’s “economic aggression.” On Friday, the U.S. filed a complaint against China at the World Trade Organization (WTO) over China’s alleged theft of U.S. intellectual property.
Critics of China’s trade practices have a solid case. Evidence abounds that China purloins American technology and strong-arms U.S. companies into handing over intellectual property. But most economists insist that tariffs won’t solve the problem. The matter requires skillful negotiating by people who actually understand the intricacies of international trade.
Can a trade war be averted? To date, Washington hasn’t handed Beijing any action list to remedy the Middle Kingdom’s supposed trade abuses. The “art of the deal,” so to speak, wasn’t apparent in the U.S. Trade Representative’s statement today:
“China appears to be breaking WTO rules by denying foreign patent holders, including U.S. companies, basic patent rights to stop a Chinese entity from using the technology after a licensing contract ends. China also appears to be breaking WTO rules by imposing mandatory adverse contract terms that discriminate against and are less favorable for imported foreign technology.”
China’s commerce ministry said on Friday that the country was planning measures against up to $3 billion of U.S. imports, with a list of 128 U.S. products that could be targeted.
Trump’s “America First” policy strives to get tough with China. But it begs the question: How does a nation get tough with its banker?
China is by far the biggest foreign holder of U.S. Treasury securities. The U.S. debt to China is $1.17 trillion. That’s 19% of the $6.26 trillion in Treasury bills, notes, and bonds held by foreign countries. The rest of the $21 trillion national debt is owned by either the American people or by the U.S. government itself. In other words, China wields enormous financial leverage over the U.S.
At a presidential campaign event Trump once said: “I beat the people from China, I win against China. You can win against China if you’re smart.” Investors increasingly have their doubts about those sentiments. Stocks are now on track for their worst month since January 2016.
Friday Market Wrap
- DJIA: -1.77% or -424.69 points to close at 23,533.20
- S&P 500: -2.10% or -55.43 points to close at 2,588.26
- Nasdaq: -2.43% or -174.01 points to close at 6,992.67
Friday’s Big Gainers
- New York & Co. (NYSE: NWY) +25.90%
Apparel chain beats on earnings.
- At Home Group (NYSE: HOME) +19.69%
Décor retailer posts strong operating results.
- Community Health Systems (NYSE: CYH) +4.62%
Hospital operator reports smaller-than-expected loss.
Friday’s Big Decliners
- Glaukos (NYSE: GKOS) -13.81%
Medical device maker faces cost containment pressures.
- Xinyuan Real Estate (NYSE: XIN) -11.00%
Analysts skittish about China-based real estate developer’s new deals.
- Forest City Realty Trust (NYSE: FCEA) -6.39%
Real estate firm replaces several directors and calls off its sale.
Letters to the Editor
“Is there good news for my heirs in the new tax bill?” — Richard F.
The tax overhaul bill signed by President Trump in December includes major new opportunities starting in 2018 to minimize the tax cost of transferring wealth.
The new law doubles the exemption base for gift, estate and generation-skipping transfer taxes but provides that starting in 2026, the exemptions revert back to the pre-2018 levels.
The exemptions would continue to be indexed for inflation but by a different, less generous measure than applicable under existing law. For details that apply to your particular circumstances, consult your accountant.
The tax filing deadline is looming. Questions about taxes? Drop me a line: firstname.lastname@example.org
John Persinos is managing editor of Personal Finance and chief investment strategist of Breakthrough Tech Profits.