The major domestic equity indexes were down about 2 percent on Friday, with the Dow falling more than 570 points, as Trump’s latest tariff threat on Chinese imports fueled increasing concern over a possible trade war with China.
Stocks added to losses and hit session lows in afternoon trading after Federal Reserve Chairman Jerome Powell indicated that the Fed will likely need to keep hiking interest rates to keep inflation under control and said it was too soon to know if rising trade tensions would hit the economy.
Fears of a trade war since Trump announced tariffs on steel and aluminum imports more than a month ago have kept investors on edge over concerns that such protectionist measures would hit global economic growth.
Trump late Thursday threatened to slap $100 billion more in tariffs on Chinese imports, while Beijing said it was fully prepared to respond with a “fierce counter strike”.
Corporations seen as most likely to be hit by a trade war with China were among the largest drags on the Dow, including Boeing, down 3.1 percent. The S&P 500 industrials index fell 2.7 percent and was the largest loser among the S&P 500 sectors. Nonetheless, selling was broad-based.
Chip manufacturers, many of which rely on China for about a quarter of their revenue, also declined. The Philadelphia semiconductor index fell 3.1 percent.
The trade war worries continued to pressure stocks even as Trump administration officials sought to dampen concerns. Trump’s top economic adviser Larry Kudlow said in various interviews that he learned of the new tariffs on Thursday night, but also said there are ongoing talks on trade between the United States and China.
U.S. Treasury Secretary Steve Mnuchin in an interview on CNBC said he was cautiously hopeful the United States will reach an agreement with China on trade.
The S&P 500 ended just above its 200-day moving average after trading well below that key support level that is watched by technical analysts.
Powell, who was speaking on the economic outlook in Chicago, also said the labor market appeared close to full employment. It was his first speech on the economic outlook since taking over as chairman on Feb. 5.
Before the session started, a Labor Department report indicated nonfarm payrolls increased by a smaller-than-expected 103,000 new jobs last month. While annual growth in average hourly earnings rose to 2.7 percent, it stayed below the 3 percent that economists estimate is needed to lift inflation toward the Federal Reserve’s 2-percent target.
Facebook was down 1.3 percent. For the first time, Facebook was behind proposed legislation requiring social media sites to disclose the identities of buyers of online political campaign ads and introduced a new verification process for people buying “issue” ads, which have been used to sow discord online.
Approximately 7.2 billion shares changed hands on the major domestic equity exchanges, a number that compares with the 7.3 billion daily average for the past 20 trading days, according to Thomson Reuters data.
Job Gains Are Minimal
The March payroll number came in at its lowest point in six months as the gains from mild temperatures faded, but a pickup in wage gains pointed to a tightening labor market, which should allow the Federal Reserve to raise interest rates further this year.
Nonfarm payrolls increased by 103,000 last month as construction and retail sectors shed jobs, the Labor Department said on Friday. That was the smallest amount since last September and followed a 326,000 surge in February.
Temperatures returned to normal in March, with snowstorms in some parts of the country. Job growth is also moderating as the labor market hits full employment. There has been an increase in reports of employers, especially in the construction and manufacturing sectors, struggling to find qualified workers.
March’s job growth was below the average of 202,000 over the past three months and matched to the roughly 100,000 jobs per month needed to keep up with growth in the working-age population.
The unemployment rate held steady at 4.1 percent for a sixth straight month, even as people left the labor force. Economists polled by Reuters had forecast the economy adding 193,000 jobs last month and the unemployment rate dropping to 4.0 percent.
A broader measure of unemployment, which includes people who want to work but have given up searching and those working part time because they cannot find full-time employment, fell two-tenths of a percentage point to 8.0 percent last month.
With labor market slack diminishing, wage growth picked up a bit in March. Average hourly earnings rose eight cents or 0.3 percent last month after edging up 0.1 percent in February. The gain lifted the annual increase in average hourly earnings to 2.7 percent from 2.6 percent in February.
The consensus among economists seems to be that an annual wage growth of at least 3 percent is needed to lift inflation toward the Fed’s 2 percent target.
There is hope that wage growth will accelerate in the second half of the year and allow the Fed to continue raising interest rates. The Fed increased borrowing costs last month and forecast two more interest rate hikes this year.
Market sentiment has been soured by the ongoing trade spat with China, stoking fears that the tit-for-tat actions could spiral into a trade war.
With layoffs at historic low levels, the sharp slowdown in job growth is likely to be temporary. Despite the slowdown in job growth in March, steady wage gains should support consumer spending amid signs gross domestic product growth moderated in the first quarter.
Growth estimates for the first quarter are mostly below a 2 percent annualized rate.
Growth in the January-March period tends to be weak because of a seasonal quirk. The economy grew at a 2.9 percent pace in the fourth quarter. Growth this year is seen boosted by a $1.5 trillion income tax cut package and increased government spending, which will offset some of the impact from the stock market gyrations.
The unemployment rate has hovered at 4.1 percent since October as people piled into the labor market. The labor force participation rate, or the proportion of working-age Americans who have a job or are looking for one, slipped one-tenth of a percentage point to 62.9 percent in March after rising to a five-month high of 63.0 percent in February.
The return of cold weather and a shortage of skilled workers weighed on hiring at construction sites in March. Payrolls in the sector fell 15,000, the first drop since last July, after surging 65,000 in February.
Manufacturing employment increased 22,000. The retail sector shed 4,400 jobs after adding 47,300 positions in February. Temporary help, seen as a harbinger of future permanent hiring, slipped by 600.
Leisure and hospitality employers added only 5,000 jobs last month, the least since September. Government payrolls rose by 1,000 in March.
Volatility Surprises Bogle
Vanguard founder Jack Bogle said that the recent volatility in stocks is uncanny. How uncanny? He’s never seen anything like it in his 66-year career. Here’s what he had to say during a CNBC interview on Thursday:
“I have never seen a market this volatile to this extent in my career. Now that’s only 66 years, so I shouldn’t make too much about it, but you’re right: I’ve seen two 50-percent declines, I’ve seen a 25-percent decline in one day and I’ve never seen anything like this before.”
He is referring to the Dow falling 2.68 percent which erased a 510-point decline on Wednesday to end up by 1 percent, or about 240 points, with the S&P 500 index down 2.42 percent and the Nasdaq Composite Index down 2.32 percent also producing stunning intraday turnarounds as fears of a trade clash between the U.S. and China receded in dramatic fashion.
Lately, the market has been prone to white-knuckle swings after a yearlong period of quiet in which a popular measure of volatility, the Cboe Volatility Index, up 14.47 percent, hovered at half its historic average of 20, until it abruptly jolted up 118 percent, its fastest rise on record in February.
The S&P 500 has already tripled the number of 1 percent swings seen over all of last year. For just the first quarter, the S&P had 23 days with a 1 percent move. The historical average going back as far as 1958 shows only 13 such sessions in those years.
Uncertainty Within the Fed
The Federal Reserve will likely need to keep raising interest rates in order to keep inflation under control, Fed Chairman Jerome Powell indicated on Friday, adding that it was too soon to know if rising trade tensions would hit the U.S. economy.
In his first speech on the economic outlook since assuming the helm at the Fed, Powell said on Friday the labor market appeared close to full employment and that inflation was poised to rise toward the Fed’s 2 percent objective in the coming months.
“As long as the economy continues broadly on its current path, further gradual increases in the federal funds rate will best promote these goals,” Powell said at an event in Chicago.
Powell said the risks to the economic outlook appeared “roughly balanced.”
In his speech, he made no mention of rising trade tensions between Washington and Beijing in which each government is threatening to hike tariffs on tens of billions of dollars in bilateral trade. Pressed about the issue after his speech, Powell told a business luncheon it was not clear whether the threatened tariffs would materialize and how big an effect they might have.
“It really is too early to say,” he said.
The Fed has been slowly raising interest rates since 2015, most recently in March when policymakers signaled they expected to increase borrowing costs two more times in 2018. Prices for interest rate futures have suggested that investors expect the Fed to do just that.
Powell’s comments on Friday bolstered that view. He said there were many signs that the job market was nearly at full strength and only a few indicators pointed to weakness.
“I will be looking for an additional pickup in wage growth as the labor market strengthens further,” Powell said.
He said Fed policymakers discussed inflation “thoroughly” at their meeting in January and that he believed inflation will be influenced by the labor market over time, meaning that a tight labor market could fuel faster price gains.