President Donald Trump sent the stock market tumbling on Friday with renewed tariff threats against China.
The Dow Jones Industrial Average fell 879 points, or 1.9%. The S&P 500 dropped 2.7%. The Nasdaq Composite sank 3.6%.
The major U.S. indexes were initially cruising in Friday morning trading, but things turned south when the president threatened “a massive increase” of tariffs on Chinese goods in response to China’s plans to limit exports of rare earth minerals.
“Just when you thought the markets would go into a quiet Friday with no economic numbers, all Heck broke out,” wrote Andrew Brenner, head of international fixed income at NatAlliance Securities. “Is this the start of a Liberation Day Two?”*
Treasury bonds market finally acted like defensive assets in the wake of Trump’s announcement, but the U.S. dollar struggled. The yield on the 2-year Treasury note dropped to 3.52%, while the 10-year’s yield fell to 4.05%. Oil prices also fell sharply.
“The sharp negative market reaction today reflects how much good news was priced in before news on US-China trade and potentially higher tariffs hit,” wrote Citi strategist Scott Chronert. “To be fair, we (and markets we believe) suspected peak tariff and trade concerns were in the past.”
The CBOE Volatility Index, or VIX, was on track to close above 20 for the first time since Aug. 1. While at around 21 it still signals relatively normal volatility, the market’s fear gauge will be worth watching as earnings season starts in earnest next week, the government shutdown rolls on, and markets react to the latest tariff standoff.
“Our thought was that earnings being strong this quarter with some modesty in expectations was going to be the catalyst for near-term index volatility,” Chronert wrote. “No matter the trigger, the reaction shows that elevated sentiment reads, high implicit growth expectations, and valuations not fully in-line with what macros can justify all create a setup for a more volatile stage of the bull market, which basically just hit its third birthday.”
Consumer staples was the only major sector in the black for much of the afternoon. Jefferies analyst Randal Konik made the case for getting defensive in response to the latest tariff threats.
“With China headlines back in focus on potential incremental tariffs, we favor a defensive posture and recommend companies with no inventory risk … and names with little or no exposure to China production,” he wrote.
Konik listed TKO Group and Planet Fitness as examples of light-inventory firms, while his picks for limited China-sourced production included Sharkninja and Birkenstock Holding.
The market had cruised higher in recent months as the White House seemed to dial back tariff hostilities with China. This was the S&P 500’s first move of at least 1%—in either direction—since it gained 1.5% on Aug. 22. If steep tariffs are back on the table, then Wall Street will need to reevaluate its rosy outlook for the rest of the year.