Market Snapshot: Dow falls over 300 points after weaker-than-expected retail sales data

What’s driving markets

Retail sales fell 1.1% in July, and were down 0.4% after excluding autos. Economists polled by The Wall Street Journal had penciled in a 0.3% monthly drop in sales in July, or a 0.2% gain when autos are excluded.

U.S. retail sales fell as supply disruptions weighed on automobile purchases, with sales at auto dealerships down 3.9% after declining 2.2% in June. Vehicle production has been hampered by a global shortage of semiconductors. Meanwhile online purchases dropped after Amazon pulled forward its Prime Day sale to June from July.

Restaurants and bars are the only services category in the retail sales report. Retail sales are mostly goods, with services such as healthcare, education, travel and hotel accommodation making up the remaining portion of consumer spending.

The fall in retail sales “could be a sign that the rapid spread of the delta coronavirus variant is convincing some consumers to stay away from public spaces again and is consistent with real consumption growth slowing sharply in the third quarter,” said Andrew Hunter, senior U.S. economist at Capital Economics, in a note.

Also Tuesday, Walmart Inc. WMT, +0.14% reported earnings that highlighted a strong start for the back-to-school season as they raised guidance, said Lindsey Bell, chief investment strategist at Ally Invest.

And year-over-year retail-sales growth remained impressive, up 15.8%, she noted, in emailed comments, with apparel and restaurant sales up significantly.

“While spending may slow in the near-term as the delta variant is present and the pricing of goods and services adjust to the supply and demand picture, I remain encouraged for the spending into the holidays and end of year,” Bell said.

In other U.S. economic data Tuesday though  U.S. industrial production rose a seasonally adjusted 0.9% in July, the Federal Reserve reported Tuesday. That’s a fastest pace since March and follows a revised 0.2% gain in June.

The National Association of Home Builders’ monthly confidence index fell five points to a reading of 75 in August, the trade group said Tuesday, its lowest in 13 months.

Investors are looking to next week’s Jackson Hole central banker symposium for an update on Federal Reserve Policy and Fed chairman Jerome Powell is scheduled to talk to teachers and students from around the country, and take questions, in a virtual meeting at 1 p.m. Eastern.

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Despite recent economic reports coming in weaker than forecast in both the U.S. and China, equities have gathered strength, thanks to strong corporate earnings.

“Although it’s disquieting, strong corporate earnings, low U.S. yields and a relatively soft U.S. dollar are the major catalysts for the U.S. market rally,” said Ipek Ozkardeskaya, senior analyst at Swissquote. “But the cliff between the economic indicators and the equity prices is somewhat unreasonable, hinting that there is potential for a sizable downside correction.”

Analysts at DataTrek Research say Wall Street estimates on S&P 500 index earnings per share, of $ 201 per share, are actually lower than the annualized EPS produced by companies in the second quarter, which equates to $ 208. “Would you sell a stock if you had a strong belief that earnings estimates were too low? Probably not. The same point goes for entire markets as well,” they said in a note to clients.

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Concern about the continued spread of the delta variant of the coronavirus that causes COVID-19 were hanging over financial markets again Tuesday. The Biden administration is preparing to announce that most vaccinated Americans should get a COVID-19 booster shot eight months after being fully vaccinated, the New York Times reported Monday night.

Fund managers, meanwhile, are taking slightly more defensive positions as they grow more pessimistic on the economy and corporate profits, according to the latest monthly survey conducted by Bank of America, which was released Tuesday.

Global fund managers have increased their holdings in healthcare, insurance, utilities and cash, while trimming their exposure to materials, commodities, emerging markets and energy, the survey found.

Also of note, the Hang Seng HSI, -1.66% slumped 1.7% in Hong Kong and the Shanghai Composite SHCOMP, -2.00% dropped 2% Tuesday after China published draft rules on competition and data security in the technology sector. Chinese stocks listed in the U.S. fell too with Alibaba BABA, -4.38%, Baidu BIDU, -3.30%  and JD.com JD, -3.42% slumping.

Which companies are in focus?

• Shares of Dow component Walmart rose 0.5%, after the retailing giant reported stronger-than-expected second-quarter sales and earnings and lifted its outlook for sales growth.
• Home Depot Inc. HD, -4.33% shares fell 4.8%, leading losses for Dow components, after the home improvement retailer reported fiscal second-quarter profit and record sales that topped expectations but same-store sales that came up short. 
• Roblox Corp. RBLX, -1.97% shares fell 2.7%, after the social-gaming platform’s results late Monday came in below Wall Street expectations.

What are other markets doing?

• The yield on the 10-year Treasury note TMUBMUSD10Y, 1.254% was at 1.26% compared with 1.255% late Monday. Yields and debt prices move in opposite directions.
• The ICE U.S. Dollar Index DXY, +0.49%, a measure of the currency against a basket of six major rivals, rose 0.5%.
• Oil futures were lower in choppy trade, with the U.S. benchmark CL.1, -0.48% down 0.5% at $ 66.94 a barrel. Gold futures GC00, -0.27% edged 0.3% lower to $ 1,783.60 an ounce.
• In European equities, the Stoxx Europe 600 SXXP, +0.07% edged up 0.1%, while London’s FTSE 100 UKX, +0.38% rose 0.4%.
• Japan’s Nikkei 225 NIK, -0.36% fell 0.4%.