Stocks fell Tuesday as concern over the state of the global economy — China in particular — and a decline in U.S. banks combined to pressure Wall Street.
The Dow Jones Industrial Average slid 361.24 points, or 1.02%, ending at 34,946.39 and breaking a three-day positive streak. The S&P 500 pulled back by 1.16%, closing at 4,437.86 and ending the session below its 50-day moving average — a move that may signal the beginning of a downtrend. The Nasdaq Composite fell 1.14% to 13,631.05.
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Financial stocks in the U.S. weakened Tuesday. Shares of JPMorgan Chase and Wells Fargo dropped 2%, and Bank of America dropped 3%. The action came after Fitch warned it may have to downgrade credit rating dozens of banks, including JPMorgan Chase. Last week, Moody’s lowered its rating on 10 U.S. banks while putting other big institutions on a watchlist for potential downgrades.
Regional banks also traded lower Tuesday, with the SPDR S&P Regional Banking ETF (KBE) trading down about 3%. Shares fell after Minneapolis Federal Reserve President Neel Kashkari spoke in favor of “significantly further” capital regulation.
“Right now it seems like things are quite stable,” Kashkari said in a Tuesday town hall meeting. “The risk is that if inflation is not completely under control, and that we have to raise rates further from here, to bring it down, that they might face more losses than they currently face today. And these pressures could flare up again in the future.”
Investor sentiment also weakened globally after China reported disappointing economic data and its central bank made a surprise rate cut.
Industrial production in China increased by 3.7% in July from the year-earlier period, missing expectations. Retail sales also grew less than expected, and the People’s Bank of China lowered interest rates by 15 basis points to 2.5% from 2.65%. But that failed to soothe investor concerns and instead only heightened concern about China’s struggling real estate market.
“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” that policymakers will succeed at boosting economic growth, said Scott Ladner, chief investment officer at Horizon Investments.
“It seems like that’s sort of the conclusion the market is beginning to come to yet again, for probably the third time this year, that the Chinese government is unlikely to stimulate in a way that’s meaningful,” Ladner added.
A packed earnings week for the largest retailers kicked into gear Tuesday. Home Depot reported earnings per share and revenue that beat analyst expectations, pushing its stock slightly higher. Later in the week, traders will parse releases from Target and Walmart.
On the data front, July’s U.S. retail sales data came in higher than expected, indicating a stronger-than-expected consumer. Retail sales increased 0.7% on a month-over-month basis. Meanwhile, economists had estimated a 0.4% increase, according to Dow Jones.