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Tech Stocks Plunge 4.1% as the Trade War Escalates

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The market sentiment has changed dramatically over the last week or so. Major indexes have plunged as the US-China trade war has quickly escalated, leaving investors rattled. US stocks had previously seen a nice bump in July amid a better-than-expected earnings season.

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The US-China trade war escalated quickly, shocking everyone

The tech-laden Nasdaq Composite Index (QQQ) plunged for the sixth straight session on August 5, marking its longest losing streak in three years. The steep decline came after China retaliated against US President Donald Trump’s latest move to levy tariffs on another $300 billion worth of Chinese goods.

China has allowed its Chinese yuan to depreciate. The yuan is now at its lowest level against the US dollar in more than ten years. As usual, Trump wasn’t shy about expressing his thoughts on the matter. The depreciation means that US goods exported to China look less attractive in terms of price.

The Nasdaq’s worst losing streak in years

The Nasdaq is down a harrowing 4.1% today alone, and it’s down more than 7.9% since July 26, when it reached its all-time high of nearly 8,340 in intraday trading.

An intensifying trade war between two of the biggest economies in the world is likely not only to make a big dent in both economies but also to have huge implications on the global economy. Economies all around the world are becoming increasingly interconnected.

The news of the trade war between the two countries has by far been the biggest drag on stocks over the last year. Stocks have seen steep declines every time there’s been negative news on the US-China trade front.

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Chip stocks and Apple fell over 4% after the trade war’s escalation

Tech stocks saw even steeper declines, as certain sectors such as semiconductors depend on China for a large portion of their sales. The iShares PHLX Semiconductor ETF (SOXX) is down 4.7% today.

AMD (AMD) and NVIDIA (NVDA) are down 5.8% and 7.2%, respectively. Both companies have high exposure to China. About 11% of AMD’s revenue comes from China, while over 20% of NVIDIA’s revenue comes from the country.

Apple has been the worst-hit FAANG stock, plunging 5.2% today. The iPhone maker has many production units in China. Any tariffs on the iPhone maker’s products will hurt its exports to the US, a very important market for it. The stock is down 9.5% this month already despite reporting decent fiscal 2019 third-quarter results.

Safe havens are the trade of the day

Investors are fleeing to safe havens such as US Treasuries and gold. Gold has hit a fresh six-year high of $1,448 per troy ounce. Meanwhile, ten-year Treasury yields are down to a nearly three year low of 1.74%. You can gain exposure to ten-year bonds through the iShares 7–10 Year Treasury Bond ETF (IEF).

Recently, stocks have been trading at very high valuations considering the number of headwinds they’ve been facing. These headwinds include the uncertainty of the trade war and the slowing global economy, among others. Stocks have been ignoring these risks, which has made them vulnerable to events such as the escalation in the trade war.

With no trade deal in sight between the US and China, the markets could continue to fall—especially with earnings season mostly behind us.

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