Why Is the Stock Market Dropping Today? Here Are 4½ Reasons. - Barron's

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Covid, China, disappointing economic data, and other factors hang over the stock market Tuesday.

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It was an ugly day for the stock market, perhaps as ugly as they come without turning into a full-blown panic. Rather than blaming a single thing for the weakness, many headlines have piled on top of each other to push stocks down.

The S&P 500 dropped 0.7% Tuesday, while the Dow Jones Industrial Average fell 282.12 points, or 0.8%, and the Nasdaq Composite declined 0.9%. The small-cap Russell 2000 has slumped 1.3%.

Here are 4½ reasons the market slid Tuesday:

Reason #1: Covid

Just when you thought it was safe for markets to ignore the Delta variant of Covid-19, it has become impossible not to. New Zealand announced it would lock down Auckland, its largest city, for seven days after one case showed up, its first new infection since February. China’s ports have run into Covid-related problems as well. In the U.S., five states hit record numbers of cases this past week. That the pace of economic growth will slow seems a given. How much it slows is an open question.

Reason #2: Retail Sales

Speaking of the economy, July’s retail sales declined 1.1%, the U.S. Census Bureau said Tuesday, a far larger drop than the 0.3% that had been forecast by economists. Other variations were even worse. Excluding autos, sales dropped 0.4% even though economists had predicted a rise of 0.2%, while the “control group” that eliminates volatile goods such as gasoline fell 1%, below expectations for a 0.3% increase. Combine it with other recent disappointing data, and it’s enough to rekindle concerns that the U.S. has hit peak growth.

Reason #3: China

China is still trying to eradicate Covid, and that’s slowing its economy. But it has other issues that have nothing to do with the virus. Online shopping growth has slowed, while retail sales and industrial production both disappointed. China’s crackdown on internet companies likely isn’t helping either, with stocks such as Alibaba (BABA) and Baidu (BIDU) getting crushed on Tuesday.

Reason #4: Investors Stopped Rotating

The stock market has been able to climb to new highs this year even as parts of the market got hit hard because investors rotated into other out-of-favor areas. That is not the case on Tuesday: every sector is lower. “The S&P 500 has remained fairly insulated from any sustained weakness as constant internal rotations fend off any sustained selling pressure,” writes BayCrest’s Jonathan Krinsky. “Yesterday the dip was bought yet again, but thus far it’s not being rewarded and divergences continue to build.” If investors don’t start rotating soon, the selloff could become a bigger problem.

Reason #4.5: Afghanistan

The chaotic pullout from Afghanistan is unlikely to have an immediate material effect on the global economy, let alone the U.S. economy, but it isn’t difficult to see it negatively affecting sentiment that has already taken a hit from inflation and Covid.

Write to Ben Levisohn at ben.levisohn@barrons.com

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