What's going on?
President Trump announced new tariffs aimed at imports from China. And that announcement helped take US stocks down to Chinatown! In fact, they fell by their most in six weeks – to nearly their lowest level of the year.
What does this mean?
The new rules will include taxes on imports (tariffs), restrictions on the acquisitions of American firms by Chinese ones, and technology transfers (in other words, American firms will be limited in what they can share with Chinese companies). One big fear is that these new rules will spark retaliatory measures that will hurt US industries, like China placing tariffs on goods that American companies sell into China.
Currently, China exports much more to the US than the US exports to China – which essentially means that the relationship is benefiting China’s economy more. But greater restrictions on trade risk making the size of the collective economic pie smaller, meaning that companies in both countries, as well as the global economy, could suffer materially.
Why should I care?
For markets: Thursday’s selloff was about more than just trade.
It’s true that some of the most globally active companies – and therefore those supposedly most exposed to a trade war – were among the worst performers: stock prices of Boeing and Caterpillar, for example, both dropped 5% each. But other stocks also performed poorly, including those of banks and tech firms (remember Facebook’s troubles?!). In short, the pain was widespread.
The bigger picture: It’s no longer all sunshine and rainbows for stocks.
At the start of the year, the global economy was booming, and the recent tax cuts by the White House promised a boon to companies’ profits. Now, the economic picture has darkened somewhat as estimates of first quarter growth decline. White House policies are decidedly less market-friendly. And borrowing costs for companies have shot higher, which means there’s less money to spend on economically productive activity (think: they’re now spending money on interest payments rather than developing new technology).