The Dow had a terrible day.
It fell 473 points, tumbling below 26,000 points — its worst day since January 3, when Apple (AAPL) warned it would miss its earnings forecast because of weak iPhone sales in China.
President Donald Trump on Sunday threatened more tariffs on Chinese imports. That initially dragged markets way down on Monday. But investors had second thoughts, choosing to believe Trump’s comments were more bark than bite. The Dow closed Monday down just 66 points.
But after the market closed, US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin doubled down on the tariff threat, telling the press Trump is serious — and the new import penalties will be imposed Friday.
So the market freaked out all over again Tuesday, falling steadily throughout the day.
Why are investors worried?
Wall Street had come to believe that Washington and Beijing were edging closer to a trade deal agreement over the past few weeks.
With trade disruption in the rear-view mirror — or so investors thought — the markets instead focused on the Federal Reserve’s interest-rate policy and the strong US economy.
Between the Fed keeping rates steady, low inflation and strong growth, investors enjoyed a “Goldilocks” market: everything was just right. The S&P 500 and the Nasdaq Composite hit record highs multiple times.
But Trump tweeted about trade Sunday, throwing financial markets for a loop — and certainty out of the window. The VIX volatility index hit its highest level since January.
What happens next?
Now investors are left to interpret Trump’s comments and whether they were just a negotiation tactic.
If the United States and China can’t work out a deal, and especially if they escalate their trade war, global economic growth could suffer. Tariffs raise costs on households and businesses, making it very difficult for companies to devise long-term plans.
China isn’t the only place with which Trump wants to change trade relations. The European auto industry is also on his list and could get hit with tariffs. The US-driven replacement for Nafta, called USMCA, took more than a year to negotiate but is not yet ratified.
An escalation of the trade spat with China is a red flag for all trade-related issues.
The light at the horizon, however, is that Chinese Vice Premier is still expected to travel to Washington this week.