Market snapshot: stocks plunge as tariff panic continues

China is clearly in the mood for the fight, and with the world’s two largest economies at loggerheads, the result has been ugly for investors.

Retaliatory tariffs announced on Friday by China sent markets into another tailspin, while comments from President Trump over the weekend will do little to assuage the situation, with US futures already pointing to another difficult trading session to come.

• Invest with ii: Open a Stocks & Shares ISA | Top ISA Funds | Transfer your ISA to ii

Amid the turmoil at the end of the week, even the usually important non-farm payrolls report was something of a sideshow. The release was stronger than expected, but investors are firmly focused on the road ahead for the time being rather than looking in the rear-view mirror, where any negative effect on the US economy has yet to surface.

However, this is likely to change. The upcoming first-quarter earnings season, which opens on Wednesday this week with an update from Delta Air Lines Inc (NYSE:DAL), will be followed on Friday by releases from both JPMorgan Chase & Co (NYSE:JPM) and Wells Fargo & Co (NYSE:WFC), who will have their own strong opinions on what may be coming in terms of their outlook statements.

The clear concern remains that until the dust begins to settle, it will be nigh on impossible to provide earnings projections of any worth, or indeed whether a potential global recession is indeed on the cards. 

With the odds of recession in the US now generally rising to 60% or above, the Federal Reserve has given no signs that it will intervene yet in an attempt to underpin a slowing economy. Indeed, the very inflationary impact of the tariffs may delay any such decision to cut at a time when rising prices were on the cusp of coming under control. 

• When markets fall, here’s what to avoid doing
• Stockwatch: four defensive shares to consider amid market wreckage
• Insider: big director deals at Glencore, Diageo and Vistry
• Sign up to our free newsletter for investment ideas, latest news and award-winning analysis

Yet for all of the uncertainty, longer-term investors may be taking some solace from the performance of the main indices in the US, which had become bloated in terms of valuations on a historic basis. Despite the 10% fall in the more traditional Dow Jones so far this year, leading to a decline of 1.5% over the last year, on a two-year view the index remains up by 14.4%.

Similarly, the benchmark S&P500 has fallen by 14% this year and by 2.5% over the last 12 months, but is ahead by 24% over two years. Even the beleaguered Nasdaq index, swollen by the effect of the Magnificent Seven and in bear market territory from its recent record high, is still up by 29% over the last two years.

However, for the moment it remains difficult to see the wood for the trees, and the end of the current rout may not yet be done. The longer-term repercussions of a trade war, where supply chains are rerouted and countries make their own arrangements, could result in some of those countries eschewing the US over the longer term having switched their alliances to others, even perhaps to the likes of China.

In the meantime, while the US is arguably suffering from self-inflicted wounds, the reverberations are global as investors scramble to gauge the full implications. Asian markets fell sharply again overnight, including China which was playing catch-up after a holiday on Friday and in Japan where the country’s reliance on exports is weighing all the more heavily on its prospects. If the rumoured move by the Chinese authorities to introduce more stimulus to prop up its economy comes to fruition, there could be some small respite, but even such a move could serve only to mitigate some of the pain being felt so far.

• Shares for the future: here’s how I rank this simple AIM stock
• A decade of pension freedoms: what you’ve done with your money
• Can Africa replicate Asian economic miracle?

It is something of a misconception that defensive shares avoid falls during volatility such as this, rather they tend to fall less violently than their more traditionally cyclical counterparts. In the UK, the FTSE100 had been riding the wave of being seen as defensive and something of a haven for investors, but today’s precipitous drop adds to last week’s weakness, entirely wiping out the gains which had been made this year.

Even the defence sector itself is bearing the brunt of the latest wave of sellers pushing against an open door, with the likes of Rolls-Royce Holdings (LSE:RR.) and BAE Systems (LSE:BA.) which had previously been on a tear, seeing sharp declines at the open.

Indeed, a universal markdown of the premier index with equity investors increasingly finding nowhere to hide leaves the FTSE100 down by 6.5% in the year to date, while the more domestically focused FTSE250 is now strongly in correction territory with a 15% decline in play.