President Donald Trump’s latest threat to China on Friday battered the stocks market. Yet, Wall Street is left wondering if his warnings have teeth. Trump said in a Truth Social post that China was holding rare earth resources “captive” and raised the prospect of a “massive” tariff hike after the Asian country expanded export regulations. He was set to meet with Chinese leader Xi Jinping in two weeks in South Korea, but Trump said there was “no reason to do so” now. The Dow Jones Industrial Average tumbled more than 500 points after Trump’s post. The S & P 500 dropped 1.7% midday, on track to snap a 33-day streak without a move of at least 1% in either direction. .SPX 1D mountain S & P 500, 1-day U.S.-listed shares of Chinese-based companies and ETFs tracking them plunged, with the iShares MSCI China ETF (MCHI) falling more than 5%. But U.S.-based rare earth miners rallied in Friday’s session as investors bet on higher demand for supply available outside of China. “Clearly, our relationship with the second largest economy in the world just got more difficult,” said Art Hogan, chief market strategist at B. Riley Wealth. Technology stocks led the decline, with the Nasdaq Composite down more than 2.5% and on pace for its worst day since mid April. Hogan said this group seeing the brunt of the downturn makes sense given its exposure to China in both manufacturing and consumption. .IXIC 1D mountain Nasdaq Composite, 1-day Buy the dip? The CBOE Volatility Index (VIX) , known as Wall Street’s “fear gauge,” on Friday spiked to highs going back to June, underscoring rising concern among traders. But some investors aren’t running for the hills following the rapid market drop, citing stocks’ strong run beforehand and the potential for the latest U.S.-China conflict to subside. Larry Tentarelli, founder of the Blue Chip Daily Trend Report, said 2%-3% slides from fresh highs are fairly common. Because of that, he said investors should see this decline as a time to add exposure to a market trading near records, particularly on high-flying artificial intelligence and technology names. “I think this will be an opportunity to buy the pullback,” Tentarelli said. “I think that China and the U.S. may be posturing somewhat, to a degree, but it could create short-term pullbacks.” .VIX 6M mountain The VIX, 6-months Vital Knowledge founder Adam Crisafulli also said investors view this situation as “posturing” and that both countries have reason to not want any more escalation. But he said the risks of another blowup in the relationship are now rising. Investors have previously embraced the idea of a “TACO” trade, meaning Trump tends to “chicken out” on policy and that it should be viewed as a way to give the U.S. leverage rather than a firm position. However, Tim Seymour of Seymour Asset Management pointed out that China has its own leverage on the rare earth front. The question for Jay Woods, chief market strategist at Freedom Capital Markets, is what comes next? Woods said this could be “another negotiating tactic” used by the White House and that this current market drawdown would end up being a “buying opportunity.” Another ‘cloud of uncertainty’ Woods is one of several market participants weighing Trump’s threat against the impacts of the ongoing federal government shutdown and the upcoming earnings season, which kicks off next week. “As we head into earnings season next week, this latest threat just throws a cloud of uncertainty the market didn’t need on top of the current shutdown,” Woods said. Infrastructure Capital CEO Jay Hatfield described the market’s Friday reaction as “normal.” While he said the uncertainty isn’t ideal for investors, the market should be able to stabilize when earnings begin rolling in. To be sure, Hatfield said there is a distinction to be made between a tariff and a trade war, with the latter disrupting all commerce between two countries. He said this update moves the U.S.-China relationship back to “trade war” territory. “The market was really priced for perfection,” Hatfield said. “A trade war is not perfection.”
