CAT Caterpillar Inc

By Michael Wursthorn 

Growing tensions between the U.S. and China exacerbated investors' fears of an all-out trade war between the world's largest economies, shaving more than 550 points off the Dow Jones Industrial Average on Friday as investors braced for more turbulence ahead.

All 11 major sectors of the S&P 500 index declined, as investors broadly sold stocks, with the deepest declines among big industrial manufacturers like Boeing Co. and Caterpillar Inc. that stand to suffer from an escalation in protectionist trade policies.

Friday's session marked the S&P 500's ninth 1% swing up or down in the past 11 trading days, a sign of stocks' uneasy footing and resurgent volatility.

Investors were already grappling with concerns that technology stocks won't be able to generate the massive gains of previous years and the threat of inflation rising more quickly than expected. Those fears were alleviated Friday when new data showed a steady rise in wages last month.

But the issue of trade and how far the Trump administration is willing to go with its protectionist agenda has become a driving force behind the stock market's gyrations for more than a month.

Those concerns deepened Friday after Chinese Commerce Ministry spokesman Gao Feng acknowledged the two governments were now in a battle and described President Donald Trump's consideration of penalties on an additional $100 billion in Chinese goods as "extremely wrong."

Investors worry the tit-for-tat responses between the U.S. and China could translate into more severe and farther-reaching sanctions that pressure American companies and raise prices for consumers.

Investors say an escalation could crimp the global economic growth engine that has acted as a key pillar for the latest leg of the stock-market rally.

Several Trump administration officials, including Larry Kudlow, head of the White House National Economic Council, Treasury Secretary Steven Mnuchin and White House press secretary Sarah Huckabee Sanders, tried to allay investors' concerns of a trade conflict to little avail.

Mr. Mnuchin, speaking on CNBC, said it would take time for the announced and potential U.S. tariffs to take effect, and meanwhile, "we'll continue to have discussions. But there is the potential of a trade war."

That last comment appeared to send the market sliding. The Dow fell as much as 767 points in the late afternoon before paring its decline to 572.46 points, or 2.3%, to 23932.76.

Ms. Sanders, meanwhile, said later Friday that, "this is something that China has created and President Trump is trying to fix it."

Federal Reserve Chairman Jerome Powell, who reiterated the central bank's intent to proceed with a slow, steady path of rising interest rates, added Friday that "tariffs can push up prices," but went on to say that it is too early to predict what would be the full economic impact of a trade war with China.

The growing uncertainty over a trade war and what that means for businesses across the country prompted the stock market's most nervous investors to sell Friday, said Kenny Polcari, managing director at broker-dealer O'Neil Securities.

"It could get uglier over the weekend, and some are getting out because it could go either way," said Mr. Polcari, who added that trading volumes were light, suggesting the selling is being driven more by smaller traders and investors rather than big money managers. "If [the administration] calms the rhetoric down over the weekend, then you'll likely see the market rally right back Monday."

The S&P 500 declined 58.37 points, or 2.2%, to 2604.47, while the Nasdaq Composite slid 161.44 points, or 2.3%, to 6915.11. For the week, the Dow dropped 0.7%, the S&P 500 fell 1.4% and the Nasdaq declined 2.1%. The S&P 500 is now off 2.6% for the year and down 9.3% from its late January peak.

Investors moved into assets that tend to hold up better during times of uncertainty, with so-called haven assets such as bonds and gold rising. "There's genuine fear that this thing with China is not going to go well, " said Jeff Lancaster, a principal of Bingham Osborn & Scarborough, an advisory firm that manages $4.2 billion.

Shares of Boeing, which has been cited as a bellwether by analysts to gauge investors' reaction to trade-sensitive stocks, fell 3.1%. Heavy machinery manufacturers Caterpillar and Deere & Co. dropped 3.5% and 3.9%.

Financial firms also weighed heavily on major indexes after those stocks were hurt by stronger bond prices, which rose after the latest trade salvos. Higher bond prices and lower yields tend to narrow the gap between short- and long-dated Treasury notes and crimp lenders' profits.

Shares of Goldman Sachs Group fell 2.3%, while the KBW Nasdaq Bank Index of large U.S. lenders slid 2.7%.

The yield on the benchmark 10-year U.S. Treasury note fell to 2.779% from 2.830% on Thursday. Yields move inversely to prices.

Meanwhile, the latest jobs report showed that wages grew as expected from a year earlier, with average hourly earnings rising 2.7% in March. That eased worries among some investors that inflation had been growing faster than expected this year and that the Fed would have to hasten its pace of interest-rate hikes to keep the economy from overheating.

"This should help moderate investors' expectations for the [Federal Reserve] getting ahead of itself," said Doug Coté, Voya Investment Management's chief market strategist.

Write to Michael Wursthorn at Michael.Wursthorn@wsj.com

(END) Dow Jones Newswires

April 06, 2018 19:25 ET (23:25 GMT)

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