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Stocks drop amid lingering trade worries

Emily McCormick
Reporter

U.S. stocks slid Thursday as further signs of a protracted trade war between the U.S. and China weighed on risk assets.

The S&P 500 ( ^GSPC ) fell 1.19%, or 34.03 points, as of market close, led by declines in the Energy sector as crude oil prices ( CL=F ) posted their largest one-day decline of the year. The Dow ( ^DJI ) dropped 1.11%, or 286.14 points, paring some losses after losing as many as 449 points earlier in the session. The Nasdaq ( ^IXIC ) declined 1.58%, or 122.56 points.

As of Thursday’s close, the S&P 500 and Dow had each declined by about 4.2% in May. The Nasdaq was down 5.8% for the month.

Trade concerns have continued to whipsaw investors. Over the past day, Chinese officials and news outlets amplified their criticism of the U.S. and its trade tactics. The latest involved an increase in the rate of tariffs on $200 billion worth of Chinese goods to 25%.

An article posted in the Chinese Communist Party’s media outlet “People’s Daily” suggested that the U.S. “has arbitrarily waved tariffs and provoked trade disputes everywhere” like “a bull that broke into a porcelain store,” according to a translation. Another stated that the U.S. is initiating a technology “cold war” through its “serial blockade” of Chinese firms including Huawei.

Meanwhile, Chinese Ministry of Commerce spokesperson Gao Feng said that the U.S. must “adjust its wrong actions” before further trade negotiations can continue, CNBC reported.

“Both the U.S. and China appear to be preparing for a prolonged period of trade conflict, including downplaying the near-term need for a deal,” Nomura economist Lewis Alexander wrote in a note Wednesday. The firm’s baseline scenario assumes that new 25% tariffs on $300 billion worth of Chinese goods go into effect before the end of 2019.

“The macroeconomic and financial market impact of the U.S.-China trade conflict thus far has been modest, lowering the threshold for implementing additional tariffs,” Alexander added.

Many U.S. companies, however, have called out the impact of tariffs on their businesses in recent calls with analysts and investors. Walmart ( WMT ) CFO Brett Biggs said last week that “increased tariffs will lead to increased prices for our customers.” Home Depot ( HD ) CEO Craig Menear said the newest tariffs would create an “incremental $1 billion” impact to the business, on top of the impact of tariffs imposed last year.

Safe-haven assets moved higher Thursday amid the continuing trade tensions. The yield on the 10-year Treasury note moved to its lowest level in 2019, gold prices rose ( GC=F ) and the yen strengthened against the U.S. dollar (JPY=X ).

[Read on: What the plunging 10-year Treasury yield says about the economy ]

Meanwhile, the pound sank lower against the dollar ( GBPUSD=X ) to just over $1.26 amid European Union elections, with results slated for Sunday. Observers are speculating that British Prime Minister Theresa May could resign this week, after leader of the House of Commons Andrea Leadsom resigned on Wednesday saying she no longer believed the 2016 Brexit referendum would be honored.

STOCKS

L Brands ( LB ) shares surged more than 11% Thursday morning after the company topped consensus expectations in first-quarter results and provided strong guidance for the full year. The parent company to Victoria’s Secret and Bath & Body Works posted adjusted earnings of 14 cents per share, versus expectations for the company to breakeven. Net sales of $2.63 billion beat estimates by $70 million. Bath & Body Works drove comparative same-store sales growth, up 13%, versus expectations for an increase of 5.2%. Victoria’s Secret, however, saw same-store sales decline by 5%, wider than the 4.7% decrease estimated.

Shoppers walk past the Victoria's Secret store on Broadway in the Soho neighborhood of New York. (AP Photo/Mary Altaffer, File)

BJ’s Wholesale ( BJ ) topped expectations for first-quarter profit and sales and reaffirmed its full-year guidance. First-quarter adjusted earnings were 26 cents per share, better than the 24 cents expected, and comparable Club sales excluding gasoline sales rose a better-than-anticipated 1.9%. Revenue of $3.14 billion was slightly ahead of expectations for $3.12 billion.

Best Buy ( BBY ) produced guidance for the current quarter that topped consensus expectations, and first-quarter earnings came ahead of expectations. First-quarter adjusted earnings of $1.02 per share were 15 cents ahead of estimates, and sales of $9.14 billion were in-line. For the second quarter, Best Buy sees adjusted earnings of between 95 cents to $1.00 per share, and revenue of between $9.5 billion and $9.6 billion. CEO Corrie Barry said the outlook includes the company’s “best estimate of the impact associated with the recent increase in tariffs on goods imported from China.”

ECONOMY

U.S. manufacturing growth slid to a near 10-year low in April, according to IHS Markit’s manufacturing purchasing managers’ index. The preliminary reading for May came in at 50.6, below expectations for 52.6, the same level as in April. Readings above 50 indicate expansion in a sector. The slower pace of growth in May was driven by a “broad-based slowdown in the rates of expansion for output, employment and pre-production inventories, while new orders declined for the first time since August 2009,” IHS Markit said.

Meanwhile, U.S. service sector growth also unexpectedly slowed in May to a three-year low of 50.9, IHS Markit said. This was short of expectations for 53.5, and the prior month’s reading of 53. The U.S. is largely a services-driven economy, and the sector had previously held up much more strongly compared to the more trade-sensitive manufacturing sector.

Taken together, the U.S. composite purchasing managers’ index fell to 50.9 in May, a three-year low.

“Growth of business activity slowed sharply in May as trade war worries and increased uncertainty dealt a further blow to order book growth and business confidence,” Chris Williamson, chief business economist at IHS Markit, said in a statement. “Worse may be to come, as inflows of new business showed the smallest rise seen this side of the global financial crisis.”

New home sales fell more-than-expected to a seasonally adjusted annualized rate of 673,000 in April, or down 6.9% from March’s revised rate, the Commerce Department reported Thursday. Nearly all of the declines stemmed from homes priced at less than $300,000. March’s rate, however, was upwardly revised to 723,000 new home sales, the highest level since October 2007.

New unemployment claims touched a five-week low for the week ending May 18, the Labor Department reported Thursday . New jobless claims fell by 1,000 to 211,000, while consensus economists anticipated a rise of 4,000 for the week. Continuing claims, however, rose more-than-expected to 1.676 million.

Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck

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