Trade tensions and tech drag down Wall Street

Open this photo in gallery:

Wall Street is quivering as its recent superstars stumble, valuations look uncomfortably stretched and an unpredictable White House adds to fears of a global trade war.

The cumulative stress hammered U.S. stocks on Monday, emphasizing how far the market’s mood has shifted from the palmy days of January when complacency ruled.

In an ugly start to the second quarter, the benchmark S&P 500 slid 2.2 per cent, the blue-chip Dow Jones Industrial Average lost 1.9 per cent and the tech-heavy Nasdaq surrendered 2.7 per cent.

In contrast, Canada stocks took matters more calmly, with the S&P/TSX Composite Index inching down 1 per cent.

Investors in the United States are struggling to come to terms with an environment where trouble often seems made in America.

The biggest fear is that Washington will become entangled in an all-out trade war with China. In March, U.S. President Donald Trump set off fireworks when he announced tariffs on aluminum and steel imports. He then proceeded to exempt most major U.S. trading partners from the levies, leaving the bulk of the measures aimed squarely at Beijing.

China retaliated on Monday by slapping duties of up to 25 per cent on U.S. food imports, including pork, fruit, nuts and wine. In total, the levies are expected to affect up to US$3-billion ($3.87-billion) of U.S. goods.

The spat could quickly escalate since Mr. Trump has promised new levies on up to US$60-billion of annual imports from China to punish Beijing for what the United States says are repeated violations of American intellectual property. If the President follows through on that vow, and Beijing responds in kind, many U.S. companies could find themselves effectively locked out of China.

Shares of Boeing Co., for instance, continued their recent slide on Monday, losing 1.7 per cent, as investors fretted about whether the U.S. airplane maker, a major supplier to Chinese state-owned airlines, will have its wings clipped by retaliatory Chinese action. Meanwhile, Tyson Foods Inc., a major U.S. pork exporter, suffered a 6.3-per-cent decline in its stock price after Beijing’s food tariffs took effect.

The trade jitters are being amplified by broader worries over the outlook for high-flying tech stocks. In recent years, the FAANGs – Facebook Inc., Apple Inc., Amazon.com Inc., Netflix Inc. and Google (controlled by parent Alphabet Inc.) – have produced huge returns for U.S. investors.

But following revelations that Facebook data wound up in the hands of a private company without the full knowledge of users, all the FAANGs are facing the threat of a regulatory backlash. The online giants are likely to be hit with much more onerous rules about how they use customer information, as well as much tougher regulations aimed at combatting fake news.

Some tech superstars are confronting their own problems. Tesla Inc., the heavily indebted electric vehicle maker, is struggling to explain what caused a fatal accident last month in which one of its vehicles crashed into a concrete lane divider while on autopilot.

For its part, Amazon has attracted the ire of Mr. Trump, who seems convinced the online retailer is somehow abusing the U.S. Postal Service. The President’s anger may be motivated in part by his resentment of Jeff Bezos, the billionaire founder of Amazon, who also owns The Washington Post, a persistent critic of the Trump administration.

The tech superstars slid on Monday, with Amazon stock falling 5.2 per cent, Facebook shares shedding 2.8 per cent and Tesla stock losing 5.3 per cent.

As the tech sector falters and trade tensions ratchet up, investors are being forced to assess whether underlying profit growth will be enough to drive the market higher. By most measures, U.S. shares are now looking distinctly frothy.

Only 16 per cent of money managers regard U.S. stocks as attractively valued, according to an RBC Capital Markets survey published on Monday. In contrast, 43 per cent said shares were expensive to very expensive.

Politics dominated the concerns of the survey respondents. Trade wars, geopolitics and Mr. Trump were seen as the biggest risks to stock prices.

Of course, moods can change quickly. Only 20 per cent of respondents indicated they were bearish or very bearish. Nearly three quarters said they were bullish to very bullish on the broad U.S. economy over the next six to 12 months.

One test of Wall Street’s mindset will come on Tuesday, when music streamer Spotify Technology SA goes public in an unusual direct listing. Despite the market-wide misgivings on display Monday, many analysts are upbeat about the prospects for the money-losing Swedish music giant. A strong debut could go a long way to restoring traders’ spirits.