Stocks Fall as Trade War Clouds Economic Outlook: Markets Wrap

Stocks took a hit as the US moved forward with tariffs on automakers, sparking concerns about an escalating trade war. Despite data showing faster-than-expected growth in the US economy, car giants like Toyota Motor Corp. and General Motors Co. saw their stocks drop. AppLovin Corp. also suffered after a negative report from Muddy Waters. Megacaps had a mixed day, with Apple Inc. rising and Nvidia Corp. falling. Lululemon Athletica Inc. delivered a bleak outlook in after-hours trading.

President Donald Trump signed a proclamation imposing a 25% tariff on auto imports, warning of harsher penalties on the EU and Canada if they align against the US. This move overshadowed the positive economic data that showed a faster expansion in the fourth quarter than previously estimated, although inflation was revised lower.

Bret Kenwell, an analyst at eToro, noted that investors are more focused on the current economic environment rather than past data, indicating that the recent numbers may not offer much confidence. He suggested that investors are looking for in-line or better inflation results and a strong employment report to feel reassured.

The S&P 500, Nasdaq 100, and Dow Jones Industrial Average all dipped, with the bond market signaling concerns about inflation as short-term Treasuries outperformed longer ones. The yield on 10-year Treasuries ticked up slightly to 4.36%, while the dollar remained volatile.

The upcoming inflation data release will provide insight into price pressures and economic activity leading up to Trump’s planned announcement on reciprocal tariffs on April 2, which he has dubbed “Liberation Day in America.” The general uncertainty surrounding tariffs is one reason why the Federal Reserve opted to keep interest rates unchanged last week.

Mark Haefele, from UBS Global Wealth Management, expressed concerns about the threat of further tariff escalation but maintained that their economic forecasts do not predict a US recession.

Looking ahead, the question for markets is whether anything can overshadow the tariff noise. Chris Larkin from E*Trade at Morgan Stanley anticipates more choppy trading in the near-term. However, Craig Johnson at Piper Sandler sees technical signals suggesting an intermediate-term low may be in place, indicating a potential recovery in equities in the coming weeks.

Despite heightened uncertainties surrounding tariffs and inflation, individual investors’ pessimism about the short-term outlook for stocks decreased in the latest sentiment survey from the American Association of Individual Investors. Meanwhile, optimism and neutral sentiment increased, albeit with bearish sentiment still above historical levels.

US equities are expected to regain their edge over European peers, with a more positive outlook for sectors like defense and banks. However, Jean Boivin, head of the BlackRock Investment Institute, cautioned that the European story is still narrow, and more fiscal impetus is needed for a stronger conviction to favor Europe over the US in the next six to twelve months.

In summary, the day saw a decline in stocks, a slight increase in bond yields, and ongoing concerns about inflation and tariffs. The market remains volatile, with investors eagerly awaiting further economic data and policy announcements to guide their investment decisions.