When U.S. stocks were flying high in 2017, “Trump trade” became one of Wall Street’s favorite buzzwords, shorthand for the optimism that the president and a Republican-led Congress would deliver outsize economic growth and energize an aging bull market.
For a while, the bet paid off — handsomely. The president’s appointees worked to loosen regulations on banking, Internet services, and air pollution, and in December, Trump signed a tax cut that reduced the top corporate rate to 21 percent from 35 percent. Fevered speculation about the Dow Jones Industrial Average reaching a record high of 21,000 in early 2017 gave way to anticipation of even higher milestones; the blue-chip index topped 26,000 this January and started churning toward 27,000.
In February, the winning streak came to an abrupt halt as improving labor-market data sparked concern the Federal Reserve might boost interest rates faster than anticipated, squeezing companies with high debt loads. There was worse to come: In March, Trump announced tariffs on steel and aluminum imports, sending Wall Street reeling.
The departure of top economic adviser Gary Cohn, a veteran of investment bank Goldman Sachs, exacerbated those declines, and the president’s announcement of 25 percent duties on Chinese imports on Thursday spurred a 724-point drop on the blue-chip Dow Jones Industrial Average, the biggest on an absolute basis since the height of the 2008 financial crisis.
On a relative basis, the Dow, the tech-heavy Nasdaq, and the broader S&P 500 all posted declines of more than 2 percent.
“The market reaction really speaks to how tariffs and the potential ramifications of them are perceived,” said Greg McBride, chief financial analyst for Bankrate.com. “Investors are rattled about the economic and inflation impacts of tariffs and a potential trade war.”
The slides continued Friday, despite a brief rally when Trump backed away from a veto threat that could have shut down the U.S. government. The Dow Jones dropped 1.8 percent to 23,533, the S&P 500 tumbled 2.1 percent, and the Nasdaq plummeted 2.4 percent.
For the week, all three indexes posted their biggest drops since Trump took office, with declines of 5.7 percent on the Dow, 5.9 percent on the S&P 500, and 6.5 percent on the Nasdaq.
Worry about the China tariffs sparking a trade war between the two largest economies on the planet “is the real story,” said Tony Roth, chief investment officer at Wilmington Trust, which manages $83.5 billion in assets. “I don’t think there was any real concern that the government was going to shut down for any material period of time.”
For now, President Xi Jinping’s response has been restrained. Beijing has announced tariffs on $3 billion of U.S. imports in response to Trump’s metals duties and said it will respond separately to the tariffs singling out Chinese goods.
Those moves suggest that China will be thoughtful in addressing Trump’s trade measures, in words if not rhetoric, Roth said. The country’s U.S. embassy said Thursday evening that China doesn’t fear a trade war and would fight “to the end” if the U.S. began one.
But even if China blinks first in the standoff, there’s a risk. “That could embolden Trump more, and if he’s too bold, the Chinese won’t be able to maintain their restraint,” Roth said.
Still, the president is likely to move carefully on any decisions that could hurt the stock market significantly. Wealth-income ratios in the U.S. are at all-time highs now, thanks in part to market gains that have inflated the value of investor holdings, Roth said. If they start to sink “because the market sells off, that’s going to have a devastating effect on incumbents in the midterm elections.”
The president — who has often touted the stock market’s growth under his administration — remains confident that the upward trend will continue despite concerns about his tariffs. The Dow Jones index has increased 28 percent since his November 2016 election, while the S&P 500 has risen 21 percent and the Nasdaq has added 35 percent.
“The stock market’s going to be great,” the president told reporters Friday. “When I came into office, the stock market was from a different planet. It’s way up. China is going to end up treating us fairly.”
