There wasn’t much to smile about after Monday’s massive sell-off on Wall Street — the worst drop of 2019 — as investors become increasingly alarmed about fraying U.S.-China trade relations.
Bright spots were hard to find in the day-long scrum. Gold prices, a fear barometer, jumped. The Japanese yen and Swiss franc, long safe harbors, advanced. "They are viewed as safe havens when the world falls to pieces because these countries are politically stable,” said Joachim Fels, chief economic adviser at Pimco.
Utilities, another go-to sector in times of stress, edged into positive territory before succumbing and turning negative late in the day. Investors also flocked to the safety of the 10-year U.S. Treasury bond, evidence of a loss of faith in stocks altogether.
The losers were everywhere. Most stocks. Technology. Retail. Oil prices, down. Natural gas, down. Dow transports — a closely watched marker for the economy — fell. Even the Russell 2000 index of small-cap stocks ($2.5 billion and below) was off. The volatility index, VIX, soared 30 percent.
Stodgy value stocks like Verizon, Procter & Gamble, PepsiCo and Johnson & Johnson were hurting, but not as much as such tech stalwarts as Apple, Visa, Facebook, Microsoft and Google-parent Alphabet. Technology companies, as a whole, accounted for a major share of the day’s losses.
“A market like this brings the high-flyers low,” said Michael Farr, president of Farr, Miller & Washington. “The Dramamine names like Pepsi, Coke and J&J, with stable balance sheets, provide a somewhat smoother ride.”
China retaliated Monday against the latest round of U.S. tariffs by allowing its tightly controlled currency to slide to an 11-year low against the dollar. The move provoked the ire of President Trump, who believes that Beijing unfairly suppresses the value of the yuan to bolster Chinese exporters at the expense of the United States. It also rattled investors who’d just come away from the market’s worst week of 2019.
The Dow Jones industrial average tumbled as much as 961 points Monday before scraping back to a 767-point decline. It ended the regular session down 2.9 percent, at 25,718.15, for its fifth down day in a row. The past two weeks have laid waste to the Dow, erasing more than 6 percent since the index hit a record high on July 15.
The Standard & Poor’s 500 index fell 2.98 percent to close at 2,844.74 on Monday. The tech-heavy Nasdaq Composite, the index most vulnerable to a China trade war because of the number of businesses there, plunged 3.47 percent for its fifth-worst session ever.
All 11 market sectors went negative Monday, with technology, financial services and energy the hardest hit. Even defensive sector consumer staples took a punch. All 30 Dow stocks fell.
And if history is a tell, there is more angst to come, as August has put up some the worst numbers for stock investors over the last three decades.
Apple, which relies on China for 20 percent of its sales, took a shellacking. Its stock fell 5 percent on Monday and is down 9 percent since the start of the month.
“The losers are anybody with big exposure to China,” said Ivan Feinseth, chief investment officer at Tigress Financial Partners. “Boeing, Caterpillar and the semiconductor stocks are most vulnerable. The biggest consumer of computer components, including semiconductors, is China. Nvidia is made there and used there.”
The yield on the benchmark 10-year U.S. Treasury bond was trolling at 1.725 percent, which means investors are scared and locking up their money for safety but very little return. Mortgage rates follow the 10-year closely, the one bright spot for consumers coming out of Monday’s mess.
“In the short run, big beneficiaries of this quick market decline include anyone in the U.S. who is looking to borrow money as long term rates continue to decline,” said Wayne Wicker, chief information officer at Vantagepoint Investment Advisers, which has $29 billion in assets under management. “Mortgage rates are down over 1.1 percent from their peak in the fall of 2018, giving current and prospective homeowners another chance to (refinance) or purchase a home at substantially lower rates. Auto finance rates may soon start to reflect better terms as well.”
The plunge arrived after China struck back against Trump’s threat to levy further tariffs on $300 billion in Chinese goods, effectively escalating the trade war, by Sept. 1.
“The Chinese have retaliated against the U.S.'s proposed 10 percent tariff by lowering the value of its currency — the yuan — below the psychologically important 7-yuan-per-dollar level,” Sam Stovall of CFRA Research said. “By weakening their currency, China is attempting to offset the effects of the 10 percent tariff, since a weaker currency makes the cost of China’s exports more affordable around the globe, while causing the cost of U.S. imports into China to go up.”
Trump criticized the move in a tweet Monday, while using China’s decision to devalue its currency as further ammunition against the Federal Reserve, which disappointed him last week by cutting interest rates by only a quarter-point in its first rate cut in more than a decade.
The trade conflict has tied up the world’s two most powerful economic engines for more than a year, threatening the health of the global economy and upending the foundations of international trade.
The abrupt escalation of the trade war sent fears rippling through global markets. Asian markets slumped, with Hong Kong’s Hang Seng Index closing down 2.85 percent. Japan’s Nikkei fell 1.7 percent, and Korea’s Kospi tumbled 2.6 percent. European stocks also fell across the board, with the Stoxx 600 index slipping 2 percent in midday trading.
Scrounging for a positive takeaway from Monday’s morass, Fels offered a bright note.
”If all this leads to a better trade deal at some stage, then you will have a lot of winners,” he said. “This may be the short-term pain that is needed for a better trade deal with protections for intellectual property rights and fairer trade practices. That’s the big question.”