Both the Dow Jones Industrial Average and the S&P 500 wiped out their 2018 gains Tuesday after disappointing profits at U.S. retailers compounded broader worries that a trade standoff with China will undermine a global economy already grappling with higher interest rates and the United Kingdom’s looming exit from the European Union.
The Dow’s drop of 551 points amounted to a 2.2 percent decline, the broader S&P 500 fell 1.8 percent, and the tech-heavy Nasdaq dropped 1.7 percent. The sell-off followed earnings from American retail chains including Target and TJ Maxx that trailed analysts’ estimates as the crucial holiday shopping season begins.
Both the retailers and their customers may be paying more for their purchases as the Federal Reserve continues to raise interest rates, a move that President Trump has criticized and that some investors worry will slow growth. The central bank is widely expected to raise its benchmark rate another 25 basis points in December. The ninth increase since they were cut to nearly zero during the 2008 financial crisis, the hike would take rates to a range of 2.25 to 2.5 percent.
“Four hikes this year is fine, given that inflation climbed from below to be more solidly at the Fed’s 2 percent target,” but the central bank should feel less urgency about further increases next year, David Bianco, chief investment officer for the Americas at wealth-management firm DWS, said in a report.
Next year’s rate increases may be affected by fallout from Trump’s trade standoff with China. His administration has imposed tariffs on $250 billion of the country’s imports and plans to raise a 10 percent levy on $200 billion of them to 25 percent in January, though some investors hope the two countries will reach detente at a G-20 meeting in Buenos Aires at the end of November.
Any agreement that’s struck “is likely to include benchmarks whereby each side can assess the other’s progress,” noted Michael Gapen, an economist with British lender Barclays Plc. “With benchmarks comes the risk that any agreement goes off track at a later date.”
While the Trump White House has taken a hard line with China, citing a trade imbalance and theft of U.S. intellectual property, the administration has been more supportive of its longtime ally the U.K., which is struggling to sell its plan for leaving the European Union to skeptical voters.
Critics have said the proposal negotiated by Prime Minister Theresa May’s government obligates the country to follow European trading rules for nearly two years after its March departure while simultaneously giving the U.K. less influence over them.
