The stock market experienced a significant decline on Tuesday as concerns about the state of the global economy, particularly in China, and a drop in U.S. banks put pressure on Wall Street. The Dow Jones Industrial Average slid by approximately 360 points, or 1%, while the S&P 500 and the Nasdaq Composite both pulled back by about 1.1%. An important milestone was reached as the broad market index closed below its 50-day moving average for the first time since March 28, indicating the potential beginning of a downtrend.
Major U.S. financial institutions faced significant weakening on Tuesday. Shares of JPMorgan Chase and Wells Fargo dropped by 2%, while Bank of America experienced a 3% decline. This drop followed a warning from Fitch, stating that it may have to downgrade the credit rating of dozens of banks, including JPMorgan Chase. Last week, Moody’s downgraded the rating of 10 U.S. banks and placed other significant institutions on a watchlist for potential downgrades.
Regional banks also suffered losses, with the SPDR S&P Regional Banking ETF (KBE) trading down by about 3% on Tuesday. The decline came after Neel Kashkari, President of the Minneapolis Federal Reserve, expressed support for “significantly further” capital regulation. Kashkari highlighted concerns about inflation control and the potential for future rate hikes leading to increased losses for banks in the future.
Global investor sentiment weakened further following disappointing economic data from China and a surprise rate cut by the People’s Bank of China. China’s industrial production increased by only 3.7% in July compared to the same period last year, falling short of expectations. Retail sales also grew less than anticipated. Despite the rate cut of 15 basis points, lowering interest rates to 2.5% from 2.65%, investor concerns were not alleviated. Instead, the rate cut heightened worries about China’s struggling real estate market.
Scott Ladner, Chief Investment Officer at Horizon Investments, expressed doubt about China’s ability to stimulate economic growth effectively. He commented, “The China trade this year has been about trying to front run government policy and government stimulus, [but] at some point, you just stop believing.” Ladner believes that the market is beginning to conclude, for the third time this year, that the Chinese government is unlikely to implement meaningful stimulus measures.
This week proved to be a crucial earnings week for the largest retailers. Home Depot reported earnings per share and revenue that surpassed analyst expectations, resulting in a slight increase in the company’s stock. Traders will also be closely monitoring the forthcoming releases from Target and Walmart.
On a positive note, U.S. retail sales data for July exceeded expectations, indicating stronger-than-expected consumer activity. Retail sales increased by 0.7% on a month-over-month basis, surpassing economists’ estimates of a 0.4% growth.
Concerns over the global economy, particularly in China, combined with a decline in U.S. banks, led to a substantial stock market slump. The uncertainty surrounding China’s economic data and the effectiveness of its government’s stimulus efforts are causing investors to question the ability to continue front-running policies. Amidst this turmoil, positive retail sales data provides a glimmer of hope for the U.S. economy. However, the global economic landscape remains uncertain, and its impact on the stock market will continue to unfold.