New York (CNN Business)Wall Street is coming to grips with the idea that the US-China trade war will get worse before it gets better.
The Dow dropped 286 points, or 1.1%, on Thursday on fears about the tariff battle slowing global growth and dinging corporate profits. The index recovered somewhat toward the end of the day — at one point it was down nearly 450 points.
China-sensitive stocks like Apple (AAPL), Boeing (BA) and Nvidia (NVDA) tumbled. Trade war fears helped set off a 6% plunge in oil prices — crude's worst day since Christmas Eve. And that drove energy stocks like Hess (HES) and Halliburton (HAL) sharply lower.
"You can't have the world's two largest economies in a long, drawn-out mutually destructive trade war and not slow the global economy," said Art Hogan, chief market strategist at National Securities Corporation.
Nervous investors plowed money into ultra-safe government bonds, driving the yield on the 10-year Treasury yield to just 2.31% — the lowest since late 2017. The VIX volatility index spiked 18%, while the CNN Business Fear & Greed Index dropped further into "fear" territory.
"There is a bit of tariff exhaustion. People are tired of hearing about it," said JJ Kinahan, chief market strategist at TD Ameritrade.
Tariffs through the 2020 election?
Wall Street firms have begun warning in recent days that President Donald Trump is likely to follow through on his threat to impose a 25% tariff on all remaining US imports from China. That kind of escalation would mark an all-out trade war scenario that few thought was possible just a few weeks ago.
Nomura's baseline scenario now assumes the new tariffs will go into effect before the end of the year, lowering GDP growth by 0.3 percentage points from late 2019 into 2020. The tariffs, which will for the first time hit consumer goods including smartphones and PCs, will simultaneously raise inflation, Nomura said in a report on Thursday.
Worse, there are few signs that the trade war will be over soon because no formal negotiations are scheduled.
"Without a clear way forward during an intensifying 2020 US presidential election," Nomura chief US economist Lewis Alexander wrote on Thursday, "we see a rising risk that tariffs will remain in effect through end-2020."
See what's driving markets now
Tensions over Huawei
Trade tensions have increased for several weeks as the United States and China both raised tariffs on each other's goods, and the United States placed restrictions on US firms doing business with Chinese tech giant Huawei on grounds of national security.
Tech stocks bore the brunt of the pain, as the technology sector could be particularly hard-hit if the trade war escalates.
US Secretary of State Mike Pompeo said the dispute over Huawei could deepen.
He reiterated the security risk the Trump Administration says is posed by Huawei's technology and said he expects other international companies to elect not to use their products.
"If you put your information in the hands of the Chinese communist party, it's de facto a real risk to you. They may not use it today, they may not use it tomorrow," Pompeo said in an interview with CNBC on Thursday. "To say they [Huawei] don't work with the Chinese government is a false statement."
But Chinese officials suggested that the dispute over Huawei could block trade negotiations in the escalating trade war.
"If the US would like to continue to talk, it should show its sincerity and correct its wrong actions," said Gao Feng, spokesman for China's Ministry of Commerce. "Only on the basis of equality and mutual respect, the talks can be continued."
Markets in China closed sharply lower with the Shanghai Composite and the Hang Seng both ending more than 1% lower.
Dreary economic numbers
The latest economic data underscore the high-stakes involved in the US-China trade war.
American business activity tumbled to a three-year low in May due in large part to concerns about tariffs, according to a report released on Thursday by IHS Markit. New manufacturing orders declined for the first time since August 2009.
"Growth of business activity slowed sharply in May as trade war worries and increased uncertainty dealt a further blow to order book growth and business confidence," IHS Markit said.
Ian Winer, former head of equities at Webush Securities, placed the blame squarely on trade.
"Stunningly bad manufacturing data," Winer said. "This uncertainty is what cripples an economy."
The retail sector has been hit particularly hard by the rising US-China tensions. Best Buy (BBY) dropped 5% on Thursday after warning it may have to raise prices because of the trade war.
"The decision to lay tariffs all over the place ... has threatened the global expansion," Peter Boockvar, chief investment officer at Bleakley Advisory Group, wrote in a note to clients. "We've sprayed bullets (tariffs) into the sky and while some may drop on the intended target, many go where they weren't meant to land."
Oil crashes
US oil prices plummeted nearly 6%, tumbling below $58 a barrel, as trade war concerns and bearish inventory data weighed on oil prices. The energy sector was the worst performer in the S&P 500, tumbling more than 3%. Concho Resources (CXO), Devon Energy (DVN) and Marathon Oil (MRO) fell 5% or more.
Stocks were also sharply lower across Europe, where mounting worries about Brexit, the state of UK Prime Minister's Theresa May's government and European parliamentary elections also weighed on investor confidence.
"Brexit is a complete unknown. No one is sure what to do with it or how long it will take," said TD Ameritrade's Kinhan.
Some of this week's losses may have been exacerbated by lower trading volumes and reluctance to place big trades ahead of the holiday weekend. US stocks are closed on Monday for Memorial Day.
