The trade tensions have stymied global growth, resulting in a considerable pullback in corporate earnings estimates for all of 2019.
"The market is adapting to the fact that we are looking at much lower growth estimates," said Chase Hinderstein, portfolio manager with The Wise Investor Group in Reston, Virginia. "Earnings estimates for the S&P have been reduced tremendously, to 3.2 per cent for this year compared to estimates of 7 per cent at the beginning of 2019 and 10 per cent last September."
Shares of the FAANG technology leaders - Facebook, Amazon, Apple, Netflix and Google-parent Alphabet - tumbled as more companies said they would abide by the restrictions against Huawei. Apple depends on China for a significant amount of its revenue.
The yield on the closely watched US 10-year Treasury had dropped to a 52-week low in a sign that investors were moving out of stocks to less risky assets. Bond yields move inversely to bond prices.
"It's all trade and tech," said Ivan Feinseth, chief investment officer at Tigress Financial Partners. "Tech and hopes for a trade deal drove the market up. And now it's driving it down."
European and Asian markets also dived, with the European STOXX 600 dropping 1.4 per cent, the German Dax falling 1.8 per cent, and France's CAC 40 tumbling 1.8 per cent. China's tech-heavy Shanghai Composite closed down 1.4 per cent, while the Hong Kong Hang Seng Index dropped 1.6 per cent.
Meanwhile, surveys released Thursday signalled economic weakness around the globe.
The closely watched Purchasing Managers Index, a key measure of industrial activity, showed slowdowns in the United States, Japan and Europe as US-China trade anxiety rippled. A similar trend line is playing out in Germany, according to a survey by the German think tank Ifo Institute for Economic Research.
"Investors are reevaluating the economy, not just the US but the global economy, with respect to new possibilities of restrictive trade and tariffs," said Howard Silverblatt of S&P Dow Jones Indices. "We are starting to see companies react to the possibility of higher tariffs and higher prices over the long term."
Growth in US manufacturing reached a nine-year low, according to financial data released Thursday.
US stocks had been on a roll coming into May because of the strong US economy, which is thriving on low interest rates, record low unemployment and robust corporate earnings. The number of jobless claims last week unexpectedly fell, indicating a health economy and labour market. But external forces detoured the markets in recent weeks as anticipation of a US-China trade deal evaporated. The Federal Reserve also signalled that it probably will not raise interest rates this year, feeding more disappointment.
The United States finds itself in a dangerous war of wills with the Iranian government over US sanctions against that country over its nuclear program and the US belief that Iran is a supporter of terrorism. The Trump administration dispatched an aircraft carrier, bombers and other military equipment to the Persian Gulf region this month as tensions between the two countries escalated.
"After posting the third best year-to-date return through April since WWII, the US equity markets were vulnerable to any potential setback," said Sam Stovall, chief investment strategist at CFRA Research. "Investors were then greeted by disappointing news about rate cuts from the Fed and a breakdown in the much-anticipated culmination to the China-U. S. trade discord."
Oil prices went into the steepest drop of 2019 on Thursday as US-Iran tensions appeared to ease. Key oil benchmarks declined more than $3 each. US West Texas Intermediate dropped more than 5%, to $58.14 per barrel. Benchmark Brent crude pulled back 4.3%, to $67.92.
"There's obviously back-channel communications going on," John Kilduff of Again Capital said. "The Trump administration is trying to tamp down the situation. The market rightfully built in several dollar of risk premium in the oil prices, and to the extent the tensions are easing, that premium is coming out."
- Washington Post
