Spooked by Trump tariffs, investors see few good options

SAN FRANCISCO (Reuters) – The specter of a trade war started by U.S. President Donald Trump rattled Wall Street on Thursday and exacerbated worries about inflation and the future of a nine-year bull market.

The S&P 500 slumped 1.33 percent after Trump said the United States would impose duties on imported steel and aluminum, making good on promises to aggressively challenge China and other countries he blames for lost manufacturing jobs.

On Wall Street, Trump’s announcement exacerbated already-brewing concerns about inflation, which could push the U.S. Federal Reserve to hit the brakes in coming months on an expanding U.S. economy and spell the end to record-breaking stock price gains.

“In an environment where people are a little bit on edge concerning future inflation, tariffs don’t exactly mollify those concerns,” warned Chuck Carlson, chief executive at Horizon Investment Services in Hammond, Indiana.

News of the tariffs drove the stocks of U.S. domestic steel and aluminum makers sharply higher, but the damage to stocks in other sectors was wide-ranging and illustrative of how broadly investors believe a trade conflict could damage the U.S. economy.

“If the trend continued to more and more tariffs being put on, that would have the effect of dampening overall demand in this country, raising prices in this country, and would ultimately be a net drain on cash flow coming into this country through investment channels,” said Kevin Caron, senior portfolio manager at Washington Crossing Advisors in Florham Park, New Jersey.

Deep corporate tax cuts enacted this year have won Trump many fans on Wall Street and helped propel the market to record highs, with the S&P 500 soaring 19 percent since his inauguration 13 months ago.

“I don’t think a trade war is going to do anybody good anywhere,” said Peter Costa, president of Empire Executions in New York.“Anything that even smells like it’s not good is going to bring the market down quickly.”

Much of Wall Street’s optimism in recent months has rested on expectations that tax cuts and healthy economic growth would push corporate earnings sharply higher in 2018. Analysts on average expect S&P 500 earnings to expand 19 percent this year, according to Thomson Reuters I/B/E/S.

Federated Global Allocation fund portfolio manager Steve Chiavarone called Trump’s trade plan“frustrating and unfortunate.” Still, Chiavarone said he expects strong earnings expectations to keep supporting stock prices, unless the European Union and China retaliate seriously against the United States.