That was fast. Wall Street’s enthusiasm for the US-China trade truce has completely vanished.
The Dow dropped more than 800 points, or 3%, on Tuesday. The S&P 500 declined 3%, while the Nasdaq tumbled nearly 3.5%.
But investors are quickly realizing that the US-China trade war is not over. The tariffs already put in place remain. And new tariffs could be implemented if the two sides fail to make progress.
President Donald Trump underscored that point on Tuesday. Trump said that he would “happily” sign a fair deal with China but also left open the possibility that the talks will fail.
“President Xi and I want this deal to happen, and it probably will,” Trump tweeted. “But if not remember… I am a Tariff Man.”
Investors have also grown worried about fluctuations in the bond market. The gap between short and long-term Treasury rates has narrowed significantly this week. Before almost every recession, the yield curve has inverted, meaning short-term rates are higher than long-term ones.
The gap between the 10-year and two-year Treasury yields dropped on Tuesday to the smallest since just before the Great Recession.
The tightening yield curve reflects fears about a growth slowdown and concerns about whether the Federal Reserve is raising interest rates more quickly than the economy can handle. Fed chief Jerome Powell gave a speech last week that investors interpreted as signaling the central bank could slow its rate hikes. However, there is a debate over whether Powell really was telegraphing a sudden change.
Barry Bannister, head of institutional equity strategy, predicts the Fed will pause its rate hikes because it has already made monetary policy too tight. He pointed to the slowdown in the housing market caused by higher mortgage rates.
“It’s playing with fire to be too tight and risk an inversion because you don’t know what the outcome will be,” Bannister told reporters on Tuesday. “Even if the Fed pauses, they may have already done too much.”
A flattening yield curve tends to hurt the profitability of banks as well. The financial sector was the second-worst performer in the S&P 500 on Tuesday. Bank of America (BAC), Citigroup (C) and Wells Fargo (WFC) declined more than 3% apiece.
By Matt Egan, CNN Business