Things Were Going Great for Wall Street. Then the Trade War Heated Up.

(The New York Times) – Stocks began 2019 with the snappiest start in more than three decades, as the economy grew faster than expected, the Federal Reserve seemed to abandon its plans to keep raising interest rates, and trade-war rancor between Washington and Beijing seemed to end. By April 30, the S&P 500 had reached a record.

Then the tweets on trade began. In early May, President Trump threatened new tariffs on Chinese products, shattering the calm as markets began a tailspin that was capped with a 1.3 percent drop for the S&P 500 on Friday.

The benchmark index ended May down 6.6 percent, its first monthly decline of the year and its worst drop since an ugly sell-off at the end of 2018.

The decline on Friday came after President Trump tweeted that he would impose a new tariff on all imports from Mexico — a tax that could rise to as high as 25 percent — unless the country’s government took steps to address the flow of migrants across the United States’ border, and Beijing announced plans to unveil a blacklist of foreign companies and people. China’s move was seen as a retaliation against the Trump administration’s efforts to deny American technology to Chinese companies.

Earlier this month, the White House issued an order effectively barring sales by Huawei, China’s leading networking company, broadening the conflict away from trade deficits and toward the difficult-to-resolve issues of technological dominance.

“I think in some sense, the Huawei ban was a bigger deal,” said Maneesh Deshpande, a market strategist at Barclays in New York. “It really opened up a new front in the trade war.”

Investors worldwide responded by pricing in the growing economic cost to the fight. Stock markets in trade-dependent economies such as Japan, South Korea and Germany also saw steep losses in May.

On Friday, the drop in American stocks was sweeping: Investors dumped industrial and machinery stocks, shares of consumer products companies, and those of giant tech companies.

Firms with close links to Mexico suffered, in light of the threat of new tariffs. Large automakers, with complicated supply chains that crisscross the border between Mexico and the United States, were particularly hard hit. Ford was down 2.3 percent and General Motors fell 4.3 percent.

Constellation Brands, the brewer of Corona and other Mexican beer brands, was down roughly 5.7 percent. JPMorgan Chase analysts estimate that more than 70 percent of its sales come from products imported from Mexico.

Kansas City Southern, a railroad that has a large business transporting oil products and autos across the southern border, fell 4.5 percent.

The peso fell sharply, tumbling 2.5 percent against the United States dollar.

The Mexico-related catalyst was new, but the slump was in keeping with broader signals markets sent this month, suggesting growing weakness in the global economy.

Benchmark prices for American crude oil fell more than 5 percent Friday, and more than 16 percent on the month. Iron ore and copper, industrial metals closely tied to the outlook for Chinese growth fell after a key economic report showed Chinese factory activity contracted in May.

The rising risks to global growth appear somewhat at odds with an array of recent reports suggesting substantial strength in the United States economy. At 3.6 percent, unemployment remains at its lowest level since 1969. Wages are growing at a strong clip. And corporate profits remain high. In the recent first-quarter earnings season, roughly 75 percent of companies beat expectations from Wall Street analysts.

But this month, sound fundamentals have been drowned out by the increasing volume of the trade spat, with investors becoming increasingly fixated on any signs that growth is flagging.

Government bond markets have been sending some of the strongest warning signals. A global decline in long-term interest rates this month, typically viewed as a sign of threats to growth, has begun to unnerve investors across Wall Street.

It continued Friday, with the yield on the 10-year Treasury note falling to 2.13 percent, according to Bloomberg, its lowest level since September 2017.

To a certain extent, those low yields are pricing in growing expectations that the Federal Reserve will cut interest rates. According to the market for Fed Funds futures, traders are putting roughly 90 percent odds on the Fed cutting interest rates by the end of the year, up from about 38 percent in the middle of April.

The expectations that the Fed stands ready to support financial markets — a view that the central bank has never fully endorsed — has probably cushioned stocks to some extent this month. But it also probably means investors will be increasingly sensitive to any clues about whether rate cuts will actually materialize over the next few months.

The markets are saying “there is no inflation and you’ve got policy too tight and you need to start thinking about lowering interest rates,” said James Bianco, president of Bianco Research, an economic consulting firm in Chicago. “Now, I think the Fed’s hand is somewhat forced.”