(Bloomberg) -- A three-week drawdown in US stocks resumed in force, again sending the S&P 500 to the precipice of a 10% correction. Fresh salvos in President Donald Trump’s trade war doused optimism spurred by another benign inflation report and stoked demand for havens in Treasuries.
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Despite some attempts to snap up discounted shares, the S&P 500 hasn’t notched two straight days of gains since its February peak. Since then, the gauge has shed about $5 trillion in value. As investors questioned lofty valuations in the market’s most-influential group, big tech came under heavy selling pressure, dragging the US equity benchmark down 1.5% on Thursday.
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In another sign of a trade-war escalation, Trump threatened to enact a 200% tariff on European wine, champagne and other alcoholic beverages. Later Thursday, Trump said he would not repeal tariffs on steel and aluminum that took effect this week, nor back off plans for sweeping reciprocal tariffs on global trading parters set to start as soon as April 2.
With less than one week to go for the next Federal Reserve decision, investors bet officials will stay put until June or July as they evaluate the effects of tariffs on America’s top trading partners. US wholesale inflation stagnated in February, though one measure of goods prices jumped and details were also less favorable for the Fed’s preferred inflation gauge.
“Thursday’s inflation data is backward looking, and the real worry is the inflationary effects that may come from tariffs, which is a wild card for markets and the Federal Reserve,” said Paul Stanley at Granite Bay Wealth Management.
The Nasdaq 100 slid 2%. The Dow Jones Industrial Average dropped 1.3%. A gauge of tech megacaps lost 2.8%. Adobe Inc. sank on a disappointing outlook, while Intel Corp. surged after naming an industry veteran as its next chief.
The yield on 10-year Treasuries dropped three basis points to 4.28%. A dollar gauge wavered.
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Trump used markets as a litmus test for the success of his first administration, and relished in the gains posted after his victory in November.
But the stark shift from economic optimism is creating an unsettling reality for traders trying to figure out where America’s markets go from here. One major question: At a time when it’s easier than ever for people to see fluctuations in their day-to-day net worth, can a stock rout take the US economy down with it?
“Market fears remain at the forefront,” said Bespoke Investment Group strategists. “Investor sentiment also remains very weak.”
Bespoke cited the latest weekly poll from the American Association of Individual Investors, which showed that bearish sentiment was above 55% for the third straight week.
“The only other time since 1987 that bearish sentiment was above the ‘speed limit’ was in the three weeks ending March 4, 2009,” the Bespoke strategists noted.
The flip side of souring sentiment is that it could be a contrarian indicator for markets, noted Jeff Schulze at ClearBridge Investments.
“Surging policy uncertainty has dented consumer and investor sentiment, raised inflation expectations and stalled the equity market rally, he said. “Should policy uncertainty ebb in the coming months, we believe risk assets will rebound.”
While the sharp drop in equity markets has been painful, Adam Turnquist at LPL Financial says the downside rate of change and current drawdown is nothing out of the ordinary.”
Since 1950, 92% of trading days are accompanied by some degree of a drawdown on the S&P 500 (roughly 8% of days have been record highs), he said. A selloff inside of 5% is the most common, occurring in around 40% of all trading days.
“Swift drawdowns also create oversold conditions, and we are beginning to see signs of the broader market reaching washed-out territory,” he said. “However, the damage to longer-term breadth, lack of institutional participation, and defensive rotational pressures leave us cautious on buying the dip right now.”
Ed Yardeni of eponymous firm Yardeni Research has lowered his year-end estimate on the S&P 500, with the best-case target cut to 6,400 from 7,000. The worst-case goal stands at 5,800.
“We continue to bet on the resilience of the economy. However, we acknowledge that it is being severely stress-tested now by Trump 2.0’s tariff turmoil and shotgun approach to paring the federal workforce,” he said.
Earlier in March, Yardeni raised the probability of a US recession this year to 35% from 20%.
US equities are pricing in a recession risk much bigger than credit markets, leaving room for a positive surprise, according to JPMorgan Chase & Co. strategists including Nikolaos Panigirtzoglou and Mika Inkinen wrote in a note.
“While there is clearly elevated uncertainty in the near term as the Trump Administration has at least initially prioritized more disruptive polices, the risk is that credit markets are proven right,” they said.
“The Treasury market is flirting with recession signals, helping amplify the risk-off sentiment in equities, while at the same time sending an alternative message of relative calm with relatively tight credit spreads,” according to Gina Martin Adams and Michael Casper at Bloomberg Intelligence.
Notably, the Federal Reserve’s Treasury-based recession model flagged year-ahead recession risk a year ago, and may be proven right if tariff uncertainty continues to hamper economic activity, they said. Historically, a model reading exceeding 30% has accurately predicted recession one year out. And the current probability is 29.76%.
“The credit model’s implied probability continues to hint at a much calmer economic climate,” they noted. The indicator’s probability for recession was above 10% for most of the past two years and now sits at 13% — still just shy of suggesting a recession is in the cards.”
Key events this week:
Some of the main moves in markets:
Stocks
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The S&P 500 fell 1.4% as of 1:16 p.m. New York time
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The Nasdaq 100 fell 2%
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The Dow Jones Industrial Average fell 1.3%
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The MSCI World Index fell 1.2%
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Bloomberg Magnificent 7 Total Return Index fell 2.8%
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The Russell 2000 Index fell 1.6%
Currencies
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The Bloomberg Dollar Spot Index rose 0.1%
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The euro fell 0.3% to $1.0859
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The British pound fell 0.2% to $1.2940
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The Japanese yen rose 0.5% to 147.51 per dollar
Cryptocurrencies
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Bitcoin fell 3.1% to $80,515.17
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Ether fell 1.9% to $1,854.86
Bonds
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The yield on 10-year Treasuries declined three basis points to 4.28%
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Germany’s 10-year yield declined two basis points to 2.86%
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Britain’s 10-year yield declined four basis points to 4.68%
Commodities
This story was produced with the assistance of Bloomberg Automation.
--With assistance from Sujata Rao, Allegra Catelli, Chiranjivi Chakraborty and John Viljoen.
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