Investors are dealing with a painful new reality: The trade war between the United States and China could last indefinitely.

That anxiety spread across the stock markets Monday, as investors around the world tried to divine the potential fallout to economic growth and corporate profits. Bonds and commodities, too, flashed warnings of a slowdown.

The stock losses have brought an end to a recent calm that had settled over Wall Street. For months, investors had assumed that the trade war, a major hazard for the global economy, would end soon. Just weeks ago, the S&P 500 reached a record high.

That illusion has been shattered, as concerns mount about slowing growth and rising costs. China said Monday that it would increase tariffs on nearly $60 billion of goods, in response to a similar move last week by the Trump administration.

China retaliates, raising tariffs against U.S. goods

The Dow Jones industrial average, which was down 719 points at its low, ended the day Monday down more than 617 points or 2.4% to close at 25,324.99. All 30 Dow stocks lost ground.

The S&P 500 fell 2.4% Monday. It was the U.S. stock bench mark’s worst day since early January. In all, the S&P 500 is down 4.6% in May.

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Monday’s toll on the biggest Northwest stocks

Percent change in stock price

Weyerhaeuser  -1.6

Expedia -1.7

Costco Wholesale -2.1

Starbucks -2.2

T-Mobile US -2.4

Fortive -2.6

Paccar -2.7

Microsoft -3.0

Amazon.com -3.6

Boeing -4.9

Source: S&P Capital IQ


Companies in trade-sensitive sectors like agriculture and semiconductor manufacturing were particularly hard hit. The tech-heavy Nasdaq composite index fell 3.4%, its worst decline in 2019.

The selling has come even as the U.S. economy continues to show significant momentum. The economy expanded at a robust 3.2% annual rate in the first three months of the year. In April, unemployment fell to 3.6%, the lowest level since 1969.

But the declines in the financial markets raise the prospect of a negative feedback loop: As worries about the economy send stock prices lower, the weakness could prompt concern among the executives whose decisions drive economic growth.

“The longer the market turmoil continues, the bigger a hit it can have on economic activity,” said Kathy Bostjancic, chief U.S. financial economist at Oxford Economics, a research firm.

The pace of economic growth has slowed in much of the world. On April 9, the International Monetary Fund reduced its growth forecast for 2019 to 3.3%, which would make it among the slowest years of growth in the past decade.

In adjusting its forecast, the fund cited, in part, the tensions between China and the United States. It also said it expected about 70% of the global economy to slow this year.

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Economists say further rounds of tariffs from both China and the United States will most likely slow the world’s economy even more. As both sides take new measures, it will be hard for businesses and consumers to avoid the fallout.

Now that the Trump administration has raised tariffs on some $200 billion of Chinese goods to 25%, its next major escalation could cover nearly every product imported from China. The White House is weighing levies on another $300 billion of imports that includes a range of consumer products, from cellphones to computers and toys, that have so far been largely unscathed by the fight.

If consumers are forced to pay for those increases, they could be forced to cut back on spending. If the increases are absorbed by businesses, that could prove to be a drag on profit growth.

On Monday, concern that the broader tariff war could envelop parts of the economy that have been sheltered from the fight became evident in the shares of small companies, which fell even further than the broad S&P 500.

These smaller companies, which often have thinner profit margins and less negotiating power with suppliers and customers, could be poorly positioned to handle the next round of tariff increases.

“The escalation of tariffs is creating these problems that corporate America is going to have to work around,” said Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets. “It’s just going to be tougher for the smaller guys.”

For now, stock investors continue to sit on sizable gains. The S&P 500 remains up more than 12% in 2019. But the sell-off also shows Wall Street is factoring in the prospect that the trade fight drags on, even as it closely monitors comments from officials in Beijing and Washington.

On Monday, anxiety about the economy appeared in other financial markets too.

Prices dropped for soybeans and copper, both of which are sensitive to global growth and trade. Interest rates rose in corporate bond markets, an indication that investors were seeking higher premiums in response to the increased risks of a worsening trade fight.

In the stock market, the damage required less interpretation. Shares of companies particularly dependent on trade with China, including semiconductor makers that rely on production networks in the country, fared badly.

Apple, which counts China as a major market for the sale of its iPhone and other devices and leans heavily on Chinese suppliers to produce them, fell 5.8%.

In addition to the effects of the trade fight, Apple shares were weighed down after the Supreme Court on Monday allowed a large antitrust class action to move forward against the company.

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Boeing, one of the largest exporters in the United States, dropped 4.9%. Wynn Resorts, which is heavily reliant on casino operations in Macao that cater to gamblers from mainland China, fell 6.2%.

There are reasons for investors to expect the U.S. economy to withstand the shock of an escalating trade war. Fears about the effect of a trade war and economic slowdown rocked stock markets late last year, only for major bench marks to recover just as quickly.

Hiring in the United States continues, and corporate profits are expected to continue rising after a year of tax cut-fueled growth.

Most critically, the Federal Reserve had abruptly pivoted away from its previous plans to keep lifting interest rates, revving up risk-taking in the process.

Those factors — the Fed in particular — made for a spring-loaded start to the year, with the S&P 500 rocketing more than 17% higher through April. That steady glide higher may also explain some of the sharpness of the downturn in recent days, as it left the market overdue for a pullback.

“We were very overdue for one,” Calvasina of RBC Capital Markets said. “We basically did a year’s worth of gains in four months’ time.”