Markets Crave the Certainty They Can’t Get

The global market for equities tumbled on Monday by the most since February 2018. The 2.52% drop in the MSCI All-Country World Index exceeded anything seen during the carnage in December. But the decline wasn’t so much about the most recent escalation of the trade war between the U.S. and China as it was about where all this is headed. In the span of a week, investors went from thinking a resolution might be at hand to the realization that there’s no end in sight.

It may be a cliche, but there’s some truth in the saying that markets hate uncertainty. After all, U.S. stocks’ sharp move downward can’t be attributed only to the potential negative impact of President Donald Trump’s latest tariff threats on the world’s largest economy. RBC Capital Markets Chief U.S. Economist Tom Porcelli points out that the $70 billion or so of levies that have already been imposed on China account for less than 0.5% of America’s $21 trillion economy. What’s tougher to calculate is what a worsening trade war will do to business sentiment, and the degree to which companies might pull back on spending and investment as long as U.S. policy remains unpredictable. Bloomberg News reported that China asked its state-owned enterprises to suspend purchases of U.S. agricultural products only after President Donald Trump on Thursday proposed adding 10% tariffs on another $300 billion in Chinese imports starting Sept. 1, a salvo that came out of blue. Using natural language processing, Arbor Research data scientist Ben Breitholtz wrote in a research note Friday that there had been a rising connection between the “exceptionally negative” tone of Trump’s tweets and retweets over the prior week-and-a-half and their impact on financial markets. “Uncertainty found within Trump’s digital communications with the public has become elevated across the board from hurling insults at Democrats to issuing new tariffs,” Breitholtz wrote. In the stock market, consumer, energy and technology sectors have been most impacted, with the tech-heavy Nasdaq 100 Index plunging as much as 4.37% Monday, its worst drop since October.