Dow drops 500 points as trade war fears return

Wary investors are holding out hope that the US and China will reach a deal before the trade barriers go into effect. White House officials, including top economic adviser Larry Kudlow, have sought to ease Wall Street's fears of a trade war.

(CNN Money) — Washington and Beijing’s game of chicken is wearing on Wall Street.

The Dow fell more than 500 points on Friday, a drop of more than 2%, after President Trump threatened to escalate a confrontation with China over trade. The S&P 500 and the Nasdaq each declined almost 2%.

Trump said late Thursday that he was considering tariffs on $100 billion more in Chinese exports, which would triple what the United States is already planning.

Related: Trump threatens China with new $100 billion tariff plan

“As long as the trade spat continues, markets are going to be jittery,” said Charlie Ripley, senior investment strategist for Allianz Investment Management.

All 30 companies on the Dow fell Friday. Caterpillar and Boeing, industrial giants that rely on China, led the index’s losses.

Earlier this week, the Trump administration announced plans for tariffs on $50 billion worth of Chinese goods in retaliation for China’s alleged theft of US intellectual property. Beijing fired back hours later by threatening tariffs on $50 billion worth of US goods, including cars, planes and soybeans.

The moves follow US tariffs that were imposed earlier this year on Chinese steel and aluminum. China targeted US fruits, nuts, wine and steel pipes in response.

“The ratcheting up of trade tensions clearly carries risks. The tariff threats, even if only intended as bargaining tools, will be difficult to back down from if talks fail to deliver results,” Capital Economics’ Julian Evans-Pritchard wrote in a research note Friday.

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Wary investors are still holding out hope that the two sides will reach a deal before the proposed trade barriers go into effect.

White House officials, including top economic adviser Larry Kudlow, have sought to ease business leaders’ fears of a trade war that would slow down the economy.

The administration was running a “good cop, bad cop kind of negotiating strategy,” said Sam Stovall, chief investment strategist at CFRA Research.

It had worked up until Friday. Stocks gained in four straight sessions.

Related: Trade war? Not so fast. Why stocks are rallying again

Kudlow again sought to downplay investors’ concerns Friday. “We’re not running a trade war,” he told reporters. “Nothing’s happened, nothing has been executed.”

Related: How much ammo does China have for a trade war?

Stocks were mostly unaffected by the March jobs report, which showed that the US economy added 103,000 positions, down from a much bigger gain in February and well below what analysts were expecting.

Wages grew 2.7% in March compared with a year earlier, in line with expectations. Investors were watching that number because it’s a barometer of inflation. In February, an unexpected jump in wage growth set off inflation alarm bells and caused stocks to plunge.

The Federal Reserve is on track to raise interest rates three times this year, but the Fed could speed up its plan if inflation creeps higher.

The combination of the hiring slowdown and modest wage growth temporarily eased Wall Street’s concerns that the economy was overheating.

The yield on the 10-year US Treasury note, which has been steadily climbing as investors’ inflation expectations rise, dipped slightly to 2.78% after the jobs report.

“Investors breathed a sigh of relief,” Stovall said. “Now we only have one issue to deal with, and that’s trade.”