'Volatility is back' amid trade war uncertainty

Investors kicked off the unofficial end-of-summer with plenty of uncertainty.

New U.S. tariffs took effect on $110 billion worth of Chinese goods, Brexit drama continues to unfold in the U.K., Argentina took steps to prop up its collapsing currency, and protests continue in Hong Kong.

“We’re a bit on edge here, and volatility is back,” John McClain, portfolio manager at Diamond Hill Capital Management, told Yahoo Finance’s “The First Trade.”

Investors dumped U.S. stocks Tuesday after fresh data showed the manufacturing sector contracted in August. Traders worry that trade tensions between the U.S. and China are spilling over into other world economies and taking a bite out of global growth.

The Dow Jones Industrial Average (^DJI) was off by more than 300 points or 1.3% in midday trading, while the Nasdaq (^IXIC) and S&P 500 (^GSPC) each fell about 1%.

“Resistance levels don’t really matter at this point,” McClain said. “It’s all about the rhetoric around trade, and I think if we don’t see a resolution fairly soon, you’re going to get to a point of no return in terms of the amount of damage that’s inflicted on the U.S. economy.”

Consumers about to feel the pain

Despite the ongoing trade war with China, U.S. consumers have been largely shielded by the tariffs. Many economists point to strong consumer spending, which fuels 70% of the U.S. economy, as a key factor in keeping the U.S. out of recession. But that could soon change.

“I don’t think the consumer has really felt the tariffs so far, but you’re going to see prices rise,” warns McClain.

A 15% tariff on about $112 billion of goods imported from China is expected to start pushing up prices on thousands of items including clothing, shoes, electronics, and furniture as early as this month.

Jennifer Lee, whose family owns Footprint shoe story in San Francisco, stands by a wall of athletic shoes, many of which are made in China and will be subject to new US tariffs on Chinese goods starting Sept 1. (AP Photo/Terry Chea)

Some economists say the latest round of tariffs amount to a tax on Americans.

“The impact, though, will depend on whether or not there will be alternative sources for some of these products,” says Michael Moore, professor of economics and international affairs at George Washington University. “That’s where consumers can really get hit, if there aren’t other countries where these products can come from.”

Research from JPMorgan Chase predicts the tariffs will cost U.S. households an extra $1,000 a year, on average.

Does the Fed matter anymore?

The weakness in the ISM manufacturing survey has investors betting on a more aggressive half-point interest rate cut from the Federal Reserve at its next policy-setting meeting Sept. 17-18.

The Fed may have dictated the stock pullback in the fourth quarter of 2018 and the subsequent bounce back early this year, but McClain says the Fed’s rhetoric doesn’t matter at this point.

“Now it’s really the [Trump] administration dictating financial markets, so whether the Fed decides to add an additional insurance rate cut or not, doesn’t really matter to risk assets at this point.”

Alexis Christoforous is co-anchor of Yahoo Finance’s “The First Trade.” Follow her on Twitter @AlexisTVNews.

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