Dow Jones Industrial Average drops 600 points as skepticism grows over U.S.-China trade agreement

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December 4, 2018 1:01pm NYSE:DIA

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From Sue Chang & Chris Matthews: U.S. stocks accelerated losses Tuesday afternoon as skepticism over the significance of an agreement reached by the U.S. and China to postpone new tariffs mounted and as the market digested a flattening yield curve in U.S. government debt.

How are the benchmarks faring?

The Dow Jones Industrial Average skidded 552 points, or 2.1%, to 25,268, while the S&P 500 index dropped 61 points, or 2.2%, to 2,728. The Nasdaq Composite Index tumbled 200 points, or 2.7%, to 7,243.

What’s driving the market?

Skepticism surrounding the U.S. and China’s ability to achieve a concrete deal to avoid new, or expanded, bilateral tariffs is rising, as investors focused on the lack of specific concessions made by China at last weekend’s G-20 meeting in Argentina where President Trump and Chinese leader Xi Jinping met.

While the U.S. agreed to a 90-day moratorium on threats to raise tariffs on more than $200 billion in imports to 25% from 10%, a comparison of official statements from Chinese and U.S. officials suggests there may be a long way to go before the two camps are able to come to an agreement that can ease tensions more permanently.

Meanwhile, confusion spread Monday night over when exactly the 90-day timeline would begin after White House economic adviser Larry Kudlow mistakenly stated that the negotiating window would begin on Jan. 1, 2019. The White House later put out a correction, stating that it began on Dec. 1.

The flattening of the U.S. yield curve is also weighing on sentiment as yields on government debt continued to fall. On Monday, the yield on five-year government debt slid below the yield on three-year debt, a phenomenon which has preceded previous recessions, and a sign that investors are more confident about current than future economic growth as the Federal Reserve raises rates.

A more widely followed spread between the 2-year yieldTMUBMUSD02Y, -0.57%  and the 10-year rate TMUBMUSD10Y, -1.50%tightened to 13.3 basis points, its narrowest in 11 years. This ratio is a popular gauge of future economic growth, and if the 10-year yield falls below the two-year, it will raise significant concerns of an impending recession.

What Fed speakers are in focus?

New York Fed president John Williams said that the U.S. economy is “in really good shape,” during a panel discussion with New York Fed economists in New York Wednesday.

“Given this outlook . . I do continue to expect that further gradual increases in interest rates will best foster a sustained economic expansion,” he said.

What are analysts saying?

“The market is reassessing if anything tangible happened at the Trump-Xi dinner,” Brent Schutte, chief investment strategist at Northwestern Mutual Wealth Management Company, told MarketWatch.

“The market wants news of concrete steps to lower tariffs, not just pronouncements,” he said, pointing out that President Trump’s statement on Sunday that China had agreed to “reduce and remove tariffs” on U.S. auto exports to China was already walked back by adviser Larry Kudlow yesterday evening.

“The major underlying story this morning is the yield curve as the 2’s-10’s spread compressed to new lows overnight (13bp) and the 2’s-5’s actually inverted,” wrote Tom Essaye, president of the Sevens Report, in a note to clients.

The movement in the bond markets “underscores growth concerns,” for equity investors, he said.

The SPDR Dow Jones Industrial Average ETF Trust (DIA) was trading at $252.48 per share on Tuesday afternoon, down $6.25 (-2.42%). Year-to-date, DIA has gained 2.91%, versus a 2.48% rise in the benchmark S&P 500 index during the same period.

DIA currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #4 of 82 ETFs in the Large Cap Value ETFs category.

This article is brought to you courtesy of MarketWatch.

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