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CNN
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US stocks whipsawed Tuesday after President Donald Trump made good on his threat to levy tariffs on Canada and Mexico, paving the way for a global trade war as leaders of both trading partners threatened retaliation.
After dropping by around 800 points earlier in the day, the Dow pared gains for a decline of around 300 points, or 0.7%, in afternoon trading. The broader S&P 500 slid 0.3% and the Nasdaq Composite rose 0.4%, recouping its losses after dipping into correction territory earlier.
The VIX, Wall Street’s fear gauge, surged to its highest level this year.
The hefty tariffs imposed by the Trump administration could contribute to a crash in the global economy, similar to the Great Depression of the 1930s, said Andrew Wilson, deputy secretary-general of the International Chamber of Commerce, according to the Wall Street Journal.
“Our deep concern is that this could be the start of a downward spiral that puts us in 1930s trade-war territory,” Wilson said.
As of Tuesday midday, the S&P 500 had erased most of its gains since Trump’s reelection in November. The benchmark index on Tuesday plummeted below its 125-day moving average, signaling investors are skittish, according to CNN’s Fear and Greed Index.
The broad selloff in markets spanned the globe Tuesday in response to Trump’s decision to go forward with tariffs: In Europe, the STOXX Europe 600 index fell 2.14% and Germany’s DAX index tumbled 3.54%. In Asia, Japan’s Nikkei 225 index fell 1.2% and Hong Kong’s benchmark Hang Seng index slid 0.28%. In China, the Shanghai Composite index rose 0.22%.
Currencies were hit too, with the US dollar sliding. Mexico’s peso fell against the dollar and the Canadian dollar pulled back after gaining slightly.
Futures on gold rose, signaling more uncertainty about geopolitical stability.
Trading partners announce tit-for-tat tariffs
The 25% tariff on goods imported from the US’s closest trading partners comes after Trump also imposed an additional 10% tariff on Chinese goods, raising that country’s rate to 20%.
The broad-based levies are intended to stem the flow of fentanyl into the United States, the Trump administration said.
But the impact of tariffs on everyday goods for Americans could stall the economic engine that drives US growth. Inflation-weary consumers are already starting to rein in their spending as uncertainty ripples through households. Layoffs are rising, consumer confidence has plunged, and inflation is still above the Federal Reserve’s target of 2%.
“The market finally took the Trump administration at its word, and the realization that the tariff talk wasn’t just a negotiating tactic is starting to sink in,” said Chris Zaccarelli, chief investment officer for Northlight Asset Management, in a note Tuesday.
China immediately struck back Tuesday, announcing tariffs on chicken, pork, beef and some agricultural imports from the US, according to a statement from the State Council Tariff Commission.
Canadian Prime Minister Justin Trudeau warned Tuesday in a press conference that Canada “will not back down from a fight.” He said he would implement a 25% tariff on C$30 billion ($20.7 billion) of US goods immediately, followed by an additional C$125 billion ($86.2 billion) in 21 days’ time.
“This is a very dumb thing to do,” he said, in remarks he said were directed at Trump. “There is absolutely no justification or need whatsoever for these tariffs today.”
Mexico’s President Claudia Sheinbaum said Tuesday she would announce retaliatory tariffs on US imports on Sunday, noting at a news conference in Mexico City: “The unilateral decision made by the United States affects national and foreign companies operating in our country, as well as our people.”
While Trump has long signaled his intent to impose stringent levies on America’s trading partners, many investors believed the threat of tariffs was a negotiation strategy. But as the deadline neared, fear rose that Trump’s actions would spark a trade war.
That triggered a massive selloff on Wall Street on Monday: The Dow ended the day down by 650 points, the S&P had its worst day since December and the Nasdaq Composite flirted with correction territory.
“While Tuesday’s tariffs are a go, it remains very unclear on just how long these tariffs will remain,” wrote Clark Geranen, chief market strategist at CalBay Investments, in a note Tuesday. “We tend to believe these are more of a negotiation tactic and not the start of a long and drawn out reciprocal trade war. Still, in these situations, investors sell first and ask questions later, as seen during Monday’s selloff.”
George Smith, portfolio strategist for LPL Financial, said in an email that as troubling as a large one-day decline in the S&P 500 can be, it’s important to put it in context. US stocks also closed at record highs just last week.
“While every situation is different, historically, buying the dip after such single day declines has been a successful strategy on average,” Smith said.
Trump is scheduled later Tuesday to deliver to Congress the first address of his second term. The theme of that speech, “Renewal of the American Dream,” comes as the stock market has now erased all gains since he became president and the Federal Reserve Bank of Atlanta’s real-time GDP forecast projects the economy could contract by 2.8%.
“Extreme fear” was the sentiment driving markets on Tuesday for the sixth day in a row, according to CNN’s Fear and Greed Index.
This is a developing story and will be updated.