New York CNN Business  — 

Wall Street’s latest trade war freakout proved fleeting.

The Dow closed just 66 points lower on Monday, recovering from a plunge of as much as 471 points. The S&P 500 and Nasdaq also erased their sharp losses, ending just 0.5% lower.

The comeback signals investors don’t believe President Donald Trump’s surprise threat to impose higher tariffs on China will spark a painful deepening of the trade war. Optimists are even hoping an historic trade deal will still be reached.

“It’s not unusual for a dealmaker to threaten to walk away — just before the deal gets done,” said Ed Yardeni, president of investment advisory firm Yardeni Research.

Monday is just the latest time that US stocks have recovered from an early morning plunge. In fact, the S&P 500 managed to close higher during half of the prior eight times it plunged 1% or more at the open, according to Bespoke Investment Group.

“It would be a real surprise if this does more than delay an agreement that both sides still seem to want,” Christopher Smart, Head of Barings Investment Institute, wrote in a note to clients.

‘Shocking escalation’

The rebound keeps intact much of the stock market’s blockbuster gains this year. The S&P 500 remains 17% higher in 2019, while the Nasdaq has soared 22%.

“I’m expecting a deal within the next few weeks, if not sooner. The Chinese need a deal. We need a deal. We’ve come too far,” said Yardeni.

Still, the return of Tariff Man, as Trump has called himself, undoubtedly caught investors off guard. The VIX volatility index spiked as much as 46% to the highest level since January before retreating. It ended the day up nearly 20%.

The CNN Business Fear & Greed Index briefly slipped into “neutral” territory before closing back in “greed” mode.

Trump’s tweet was shocking because investors had been very optimistic a trade deal was imminent. That has now been cast in doubt.

“A big underpinning of the rally was this consensus that a trade deal with China would eventually get done,” said Michael Block, market strategist at Third Seven Advisors. “This tweet may be a tactic but it has bulls unglued and playing what if.”

World markets suffered sharper losses as investors express concern about how tariffs and trade uncertainty will impact China’s already-slowing economy. China’s Shanghai Composite Index (SHCOMP) tumbled 5.6%, its worst one-day drop since February 2016, according to Refinitiv. The Shenzhen-based CSI 300 Index closed 5.8% lower. China’s yuan dropped 0.8% against the US dollar in offshore trading. Hong Kong’s Hang Seng dropped almost 3%.

“Shocking escalation — even on Trump standards,” Chris Krueger, analyst at Cowen Washington Research Group, wrote in a note to clients on Sunday.

On Sunday, Trump threatened on Twitter to increase tariff rates on $200 billion in imports from China to 25%, up from 10% currently. The president said the increase would take effect on Friday.

Goldman Sachs: Only a 40% chance tariffs go up

Investors are unsure if Trump is trying to apply more pressure to Beijing to get a deal done quickly, or if he intends to carry through on his threat, market analysts said. Either way, the threat increases the risk that the trade deal could come undone.

The threat also has negative implications for the outlook of other trade spats, including autos and the passage of the the USMCA deal that is set to replace NAFTA, according to analysts at Goldman Sachs.

“His move injects major uncertainty into negotiations, which now face a rising risk of an extended impasse — perhaps even through the US presidential election,” Michael Hirson, head of China and Northeast Asia at the Eurasia Group, wrote in a note on Sunday.

China signaled on Monday it still plans to attend upcoming trade talks in Washington.

The Goldman Sachs analysts said that while Trump’s announcement “lowers the odds of a successful conclusion” to US-China trade negotiations, the firm thinks there is only a 40% chance that tariffs on China will go up on Friday.

“We believe an agreement is slightly more likely to be reached instead,” Goldman Sachs wrote in a note to clients on Sunday.

Still, that represents quite the shift given the fact that US stocks had raced higher in recent months due in part to hopes of a US-China trade deal. The market’s rebound was also driven by stronger economic reports and the Federal Reserve slamming the brakes on plans to raise interest rates.

“Without a successful US-China trade breakthrough, it’s much harder to be constructive on the global macro outlook,” said Alec Young, managing director of global markets research at FTSE Russell.

The S&P 500 and Nasdaq hit record highs over and over again over the past weeks.

Renewed trade tensions could slow down US economic growth by creating uncertainty and raising costs on businesses and households.