Wall Street and global stocks plunged anew on Tuesday, as the threat of an all-out U.S.-China trade war rattled investor confidence. Technology stocks were at the heart of the selloff, with the Nasdaq Composite Index losing 2%.
Nasdaq Composite Index sees renewed turbulence this week
Source: Yahoo Finance.
The S&P 500’s information technology index was also among the hardest hit, as traders cut ties to FAANG stocks and emerging tech players.
Trump’s Trade War
The selloff in the early part of the week followed a Sunday tweetstorm by President Donald Trump, who announced that a fresh round of tariffs on Chinese imports was coming in a matter of days. Trump said the full 25% tariff rate would apply on $325 billion worth of Chinese goods. Currently, only $50 billion of Chinese imports are subject to the stiffest tax rate.
As it turns out, President Trump’s trade-war threat was a direct response to China’s unwillingness to play ball on an important issue: intellectual property.
According to Reuters, U.S. Trade Representative Robert Lighthizer informed President Trump that Beijing was reneging on its prior commitment to adjust policies that require U.S firms to hand over intellectual property when doing business in China. This feeds into a much larger debate over forced technology transfers from U.S. firms and theft of American trade secrets.
Before the fallout, the U.S. and China were looking to finalize a new trade agreement by early June.
Why Tech Stocks are Most Vulnerable
Higher tariffs on China-made goods could mean higher price tags on mobile phones and other consumer electronics. This is a bad combination for American tech stocks, especially at a time when mobile phone sales are peaking.
The threat of retaliatory measures from China could make companies like Apple Inc. (NASDAQ: AAPL), which have struggled in mainland markets, more vulnerable to declining sales. Microsoft Inc. (NASDAQ: MSFT), which derives 10% of its revenues from China, could also be hit hard should Beijing decide to limit the reach of American companies.
Then there are the major chipmakers – Advanced Micro Devices (NASDAQ: AMD), Nvidia (NASDAQ: NVDA) and Micron (NASDAQ: MU) – which are among the most vulnerable to a tariff war. The semiconductor industry is extremely sensitive to Chinese demand. The sector was among the hardest hit in the fourth quarter when the trade-war threat was at its highest.
Nasdaq Composite Index officially entered bear-market territory in the fourth quarter
Source: Yahoo Finance.
According to RBC Capital Markets, GPUs and semiconductors are “most at risk to the downside” if trade tensions continue to rise.
During the height of the tariff threat last year, tech giants Cisco Systems (NASDAQ: CSCO), Dell Technologies (NYSE: DELL) and Hewlett Packard Enterprises (NYSE: HEP) urged the Trump administration to avoid a direct confrontation with China. In a joint statement, the companies said:
“In addition to leaving us with less capital to invest in research and development, over time the reduced profits that the duties could cause could lead to hiring freezes, stagnant wages, and even job losses, as well as harm to investors such as reduced dividends and erosion of shareholder value,” the companies said.
Conclusion
With U.S.-China trade relations hanging in the balance, the bull market that investors seemed so sure of just a few weeks ago could be on its last leg. According to Jeffrey Gundlach of the DoubleLine asset manager, there’s a strong chance that the tariff war will escalate because neither country wants to come across that it gave in to opposing demands. If this does occur, investors can expect a significant rollover in the technology sector.
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