NEW YORK - Last week’s announcement of more U.S. tariffs on Chinese goods may have undermined the prospects for small-cap stocks to rebound this year, even after a brief respite from the Federal Reserve’s recent interest-rate cut. Just a day after the Fed cut interest rates for the first time in more than a decade, President Donald Trump vowed on Aug. 1 to impose 10% tariffs on an additional $300 billion of Chinese goods beginning on Sept. 1.
Strategists have said the risks to the U.S. economy increase as the trade war escalates. Morgan Stanley’s chief economist wrote in a note on Monday that if the trade war intensifies with the United States raising tariffs to 25% on all imports from China for four to six months, the global economy could enter a recession in three quarters.
“Small caps looked like they were about to break out,” he said. “But as soon as tweet came out, they broke down.” In particular, recent developments on tariffs have brought small-cap companies’ shrinking profit margins back into focus, an issue that has dragged down their shares over the past year.
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