Shell-Shocked Investors Find Trade Angst Is Latest Market Menace

(Bloomberg) -- First it was valuations, then inflation and surging bond yields. 

Now it’s concern the world is on the brink of a trade war that’s sending equity investors back into a stew they thought they’d just pulled out of.

A two-day pullback became a three-day swoon Thursday as equity traders fretted about international retaliation after President Donald Trump said the U.S. will slap tariffs on steel and aluminum imports. Anxiety about protectionism runs deep among owners of the biggest U.S. companies, many of which get more than half their sales from overseas.

“The members of the S&P 500 has become quite globalized, and one may argue that most of the things that have benefited this bull market have been globalization-related,” Michael O’Rourke, JonesTrading chief market strategist, said by phone. “We are seeing some attempts to undermine this very foundation of the bull market, and it doesn’t bode well for S&P 500 companies and their global peers.”

Of course, stocks haven’t needed a looming trade war to fall this week. On Tuesday it was perceptions of hawkishness in new Federal Reserve Chair Jerome Powell’s testimony, while Wednesday’s swoon was ascribed to weakening chart patterns. But the contour of the latest selloff suggested trade anxiety had crept into investors’ radar.

Normally, the diverse provenance of earnings in U.S. megacaps is seen as a blessing -- a shield from the vicissitudes of the domestic economy. Not so Thursday, when benchmarks dropped in line with their reliance on overseas earnings.

“These are the dangers,” said said Donald Selkin, New York-based chief market strategist at Newbridge Securities Corp. “It would raise the price for the companies that use steel. And tariffs could lead to a potential trade war, that’s the main thing, and that could be very negative for the economy because other countries could put on tariffs as well.”

The S&P 500 slid 1.4 percent as of 3:45 p.m. in New York, while gauges of mid- and small-cap stocks had losses one-third the size. Investors saw the staggered retreat as evidence protectionist threats are calling today’s tune in a suddenly listing U.S. equity market.

Among the 100 largest companies in the S&P 500, pain was even more pronounced, with losses approaching 1.8 percent. The declines brought the drop in the S&P 500 since Tuesday toward 4 percent, a slump that before February’s meltdown would have been the biggest since the Brexit swoon of June 2016.

About 43 percent of S&P 500 sales came from foreign countries in 2016, data compiled by S&P Dow Jones Indices show. The comparable portion is about 20 percent in the Russell 2000.

President Donald Trump said the U.S. plans to impose 25 percent tariffs on steel imports and 10 percent on aluminum, and expects to sign a formal order next week. The Institute for Supply Management called the proposal a “big mistake.” The Federal Reserve earlier praised the benefits of trade, while the European Union has said it could respond in kind to any new tariffs.

To contact the reporters on this story: Elena Popina in New York at epopina@bloomberg.net, Sarah Ponczek in New York at sponczek2@bloomberg.net, Kailey Leinz in New York at kleinz1@bloomberg.net.

To contact the editors responsible for this story: Jeremy Herron at jherron8@bloomberg.net, Chris Nagi

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