The S&P/TSX Composite Index suffered its biggest loss of the year Tuesday, and all three major U.S. stock indexes finished lower, as trade tensions escalated following U.S. President Donald Trump’s new tariffs on Canada, Mexico and China.
After two days of heavy losses this week, the S&P 500 - Wall Street’s most important benchmark - has now erased all its gains since Mr. Trump was elected in November.
On Tuesday, the Nasdaq composite slipped 0.4%. The tech-heavy index briefly reached a 10% decline from its most recent closing high, which is considered a market correction, but gains for Nvidia, Microsoft and other tech heavyweights helped pare those losses as some investors went looking for bargains.
“Sentiment has shifted incredibly quickly from excitement about a new Trump administration to fear,” said Tim Urbanowicz, chief investment strategist for Innovator Capital Management. “Everyone had been focused on the pro-growth policies, and I don’t think investors were taking him seriously when he talked about tariffs, but now that threat has materialized and created a growth scare.”
The Cboe Volatility Index - also known as Wall Street’s fear index - has been rising steadily in recent trading sessions. On Tuesday it briefly broke above 26, with any level higher than 20 seen as a sign that stock market participants are uneasy, noted Jim Carroll, senior wealth advisor at Ballast Rock Private Wealth Management.
“Underneath the surface, markets have become less and less enthusiastic than the closing prints on the S&P 500 told us,” said Carroll.
Canadian Prime Minister Justin Trudeau described the U.S. tariffs that took effect Tuesday as “a very dumb thing to do” and hit back with 25% tariffs on $30 billion worth of U.S. imports.
Financial stocks were among the heaviest weights on both the S&P 500 and S&P/TSX Composite indexes. JPMorgan Chase fell 4% and Bank of America lost 6.3%. Financials in Toronto fell 2.8%, with iA Financial Corporation Inc down 6.1%.
Overall, the S&P/TSX composite index ended down 429.57 points, or 1.7%, at 24,572.00, its second straight day of steep losses and its biggest decline since Dec. 18. It was the lowest closing level for the TSX since Jan. 13.
Given the U.S. tariffs make it likely Canada will soon enter a recession, some market observers have been a little surprised the damage to equity markets hasn’t been harsher.
Derek Holt, head of capital markets economics at Scotiabank, suggested the tepid reaction could be because some of the tariff scenario was already priced into asset prices. Meanwhile, stimulative measures could be on the way by Ottawa, and the Bank of Canada is likely to cut interest rates further, helping to support the economy.
“Another reason is because what we don’t know is duration and that’s key,” added Holt in a note. “Trump is a showboater and self-promoter with zero scruples and so for all we know he put these tariffs on just in order to be able to point to them in his speech [Tuesday night] but they may not last.”
Meanwhile, the souring risk appetite may eventually provoke a pivot on trade policy by the Trump administration, Holt suggested.
Industrials and technology both lost 1.8% in Toronto. The materials group also ended lower but the decline was cushioned by gains for gold mining shares. The price of gold rose, benefiting from a weaker U.S. dollar and safe-haven demand.
Real estate was one of two major sectors to end higher, adding 0.2%, as bond yields fell. Investors raised bets on an interest rate cut next week by the Bank of Canada to support the economy. By late afternoon, money markets were pricing in about 75% odds of a quarter point rate cut at the bank’s next policy announcement on March 12.
In the U.S., worries about tariffs raising consumer prices and reigniting inflation have been weighing on both the economy and Wall Street.
The tariffs are prompting warnings from retailers, including Target and Best Buy, as they report their latest financial results. Target fell 3% despite beating Wall Street’s earnings forecasts, saying there will be “meaningful pressure” on its profits to start the year because of tariffs and other costs.
Best Buy plunged 13.3% for the biggest drop among S&P 500 stocks after giving investors a weaker-than-expected earnings forecast and warning about tariff impacts.
Companies in the S&P 500 are wrapping up the latest round of quarterly financial reports. They’ve posted broad earnings growth of 18% for the fourth quarter. But Wall Street has already trimmed expectations for the current quarter to about 7% growth from just over forecasts of 11% at the beginning of the year.
Concerns about profits follow a series of economic reports with worrisome signals that include U.S. households becoming more pessimistic about inflation and pulling back on spending. Consumer spending has essentially driven U.S. economic growth in the face of high interest rates.
The S&P 500 fell 71.57 points to 5,778.15. The Dow dropped 670 points to 42,520.99, and the Nasdaq shed 65.03 points to 18,285.16.
With reports from The Associated Press and Reuters