Monday witnessed a rollercoaster for Wall Street, as stock markets reacted sharply to escalating trade war tensions. Initially, the market plummeted due to concerns over President Trump’s newly imposed tariffs. However, stocks pared some losses later in the day following news of a temporary reprieve from Mexico.
The S&P 500 ultimately closed down 0.8%, while the Dow Jones Industrial Average fell by 122 points, or 0.3%, and the Nasdaq Composite experienced a steeper decline of 1.2%. This downturn occurred despite even more significant drops observed in Asian and European markets earlier in the day.
At the start of trading, the U.S. stock market was bracing for a much more severe sell-off. The S&P 500 at one point was nearly 2% lower, and the Dow had plunged as much as 665 points. This initial panic stemmed from anxieties about the potential repercussions of tariffs on American businesses.
Technology giants and other companies perceived as vulnerable to increased interest rates were among the hardest hit. These higher rates are a potential consequence of tariffs imposed by the U.S. on imports from key trading partners like Canada, Mexico, and China.
The core apprehension on Wall Street revolves around the possibility that Trump’s tariffs could inflate the prices of everyday goods for U.S. consumers, from groceries to electronics. This could exert upward pressure on inflation, which has generally been moderating since its peak three summers prior. Persistently high or accelerating inflation might deter the Federal Reserve from implementing interest rate cuts, which were initiated in September to stimulate the U.S. economy. Simultaneously, the profitability of U.S. companies could be squeezed by a slowdown in global trade.
However, the market’s trajectory shifted as news broke that Mexican President Claudia Sheinbaum had announced a month-long suspension of tariffs on goods from her country, following discussions with President Trump. This development allowed U.S. stocks to recoup some of their earlier losses. The Dow even briefly entered positive territory in the afternoon. Following the U.S. market close, Canadian Prime Minister Justin Trudeau also announced a similar 30-day pause after his conversation with Trump.
Many on Wall Street had hoped that President Trump’s tariff rhetoric during his presidential campaign was merely a negotiating tactic rather than a definitive policy shift. Monday’s rapid changes concerning Mexico and Canada raise questions about whether tariffs are indeed being used as leverage in trade negotiations.
When trading commenced on Monday, the perceived immediacy of tariffs ignited fears of an escalating trade war capable of inflicting damage on economies globally, including that of the United States.
Brian Jacobsen, chief economist at Annex Wealth Management, highlighted the localized impact of trade tensions, particularly in the Midwest. He pointed out the region’s reliance on Canadian crude oil for gasoline production, suggesting that refineries would face challenges in quickly finding alternative sources.
Crude oil prices experienced volatility on Monday amidst this uncertainty. The price of benchmark U.S. crude fluctuated from $72.53 per barrel on Friday to nearly $75 before the U.S. stock market opened on Monday, before briefly declining back towards $72.
President Trump himself acknowledged that Americans might experience “some pain” from the tariffs, but asserted that this pain would be “worth the price” to revitalize America. He further stated on Sunday night that import taxes were “definitely” coming for the European Union and potentially the United Kingdom as well.
Despite the immediate market reaction, some Wall Street analysts remain doubtful about the long-term sustainability of a trade war, especially given President Trump’s close attention to stock market performance. As Monday morning demonstrated, escalating trade tensions can trigger stock market slides. Solita Marcelli, chief investment officer, Americas, at UBS Global Wealth Management, suggested that “significant stock market volatility could lead to a change in approach” regarding trade policy.
Several companies were notably affected by the market downturn. Constellation Brands, which markets Modelo and Corona beers in the U.S., saw a 3.5% decrease. Best Buy, a retailer of globally manufactured electronics, fell by 2.4%. Brown-Forman, the producer of Jack Daniel’s with sales in Canada, experienced a 3.3% drop.
Overall, the S&P 500 declined by 45.96 points to close at 5,994.57. The Dow shed 122.75 points, ending at 44,421.91, and the Nasdaq composite fell by 235.49 points to 19,391.96.
Amid the stock and cryptocurrency sell-off, investors sought refuge in longer-term U.S. government bonds, traditionally considered safe-haven assets. This increased demand for bonds pushed their prices up, causing Treasury yields to fall.
The yield on the 10-year Treasury note edged down to 4.53% from 4.55% on Friday, having earlier dipped as low as 4.46%. This represents a temporary respite from the recent rise in longer-term Treasury yields that had been unsettling Wall Street, fueled in part by concerns about persistent inflation and potentially higher interest rates.
Conversely, short-term Treasury yields increased on Monday as expectations for Federal Reserve interest rate cuts diminished. The yield on the two-year Treasury note rose to 4.25% from 4.21%.
Elevated yields generally exert pressure across various investment classes, but they disproportionately affect stocks considered to be overvalued. This particularly impacts companies like Nvidia and other high-growth stocks that have benefited from the artificial intelligence boom. Nvidia shares fell 2.8% and were a significant drag on the S&P 500.
These AI-driven stocks had already faced selling pressure the previous week after a Chinese tech company announced the development of a large language model comparable to U.S. rivals, but potentially requiring less expensive hardware.
President Trump’s tariff announcements overshadowed other potentially market-moving events scheduled for the week, including Friday’s jobs report and upcoming earnings releases from major companies like Alphabet and Amazon.
Global stock markets mirrored the negative sentiment, with indexes falling 1% in London, 1.2% in Paris, and 1.4% in Frankfurt. Asian markets experienced steeper declines, with South Korea’s Kospi sinking 2.5% and Japan’s Nikkei 225 falling 2.7%.
In conclusion, the stock market drop today was primarily driven by renewed fears of a trade war triggered by President Trump’s tariffs. While temporary reprieves offered some relief, the underlying uncertainty surrounding trade policy and its potential economic impact continues to fuel market volatility. Investors will be closely monitoring further developments in trade negotiations, inflation data, and Federal Reserve policy to gauge the market’s direction in the coming days.
