Why Did Stocks Fall? Tesla Stock’s Surge Helped Lift the S&P 500 to a Record – Barron’s

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The half to a Johnson & Johnson Covid-19 vaccine chilled value stocks. Growth stocks, led by electric-vehicle giant Tesla, powered the S&P 500 to a new high.

Stocks were mixed Tuesday, as trading action implied investors were concerned about a negative vaccine development from Johnson & Johnson. Yet the S&P 500 index rose to a record close.

The Dow Jones Industrial Average fell 68.13 points, or 0.20%, to close at 33,677.27. The S&P 500 added 13.60 points, or 0.33%, to end at 4,141.59, a new high. The Nasdaq Composite surged 146.10 points, or 1.0%, to close at 13,996.10. The biggest gainer in the S&P 500 was electric-vehicle giant Tesla (ticker: TLSA), which saw shares soar 8.6% on investor anticipation for earnings.

The Food and Drug Administration halted Johnson & Johnson’s (JNJ) Covid-19 vaccine use, as it has been shown to cause rare blood clots in patients. The stock fell 1.3%. This removes—for the moment—100 million doses for the U.S. for the first half of the year, and puts some strain on the country’s ability to reopen. The gradual reopening has been a theme driving stock market performance this year.

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In light of the development, value stocks, whose performance is tied to the perceived condition of the current economy, underperformed. The Industrial Select Sector SPDR ETF (XLI) fell 0.5%. With interest rates slipping on the day—as skepticism on the pace of reopenings weighs on economic demand and inflation expectations—bank stocks fell hard. The SPDR S&P Bank ETF (KBE) fell 1.8% as lower yields on long-dated bonds reduces profitability for banks, and other sectors, as well. Delta Air Lines (DAL) stock fell 1.2%, and shares of Bloomin’ Brands (BLMN), owner of Outback Steakhouse, dove 3.8%. The S&P 500 rose on the stregth of growth stocks such as Tesla. The Vanguard S&P 500 Growth ETF (VOOG) rose 1%.

Data emerged, though, that show that inflation is coming. Headline consumer price inflation, which includes food and energy prices, came in at 2.6% year-over-year growth for March.

“Inflation is picking up now,” Sarah House, senior economist at Wells Fargo, wrote in a note. “The pickup in inflation is attributable to more than just last spring’s low base comparisons.” Simply put, the low prices in the economy seen in the second half of March last year, combined with the normalizing economy and pent-up demand from trillions of dollars of fiscal stimulus, enabled a strong percentage gain in prices. House’s point is that the inflation is a result of strengthening demand, not just an easy comparison. If inflation runs well above 2% beyond this spring, the Federal Reserve may tweak its policy to lift interest rates, which would pressure stock valuations, as higher yields on risk-free investments make riskier stocks less attractive.

Still, trading on Tuesday centered on the incremental decrease in reopening expectations, as slower reopenings would weigh on inflation going forward.

“While the jump in CPI is pretty significant, the market may take it with a grain of salt—it could already be priced in as the market has been skittish about rates for some time,” wrote Mike Loewengart, managing director of investment strategy at E*Trade, wrote in emailed remarks to the press. “The real curveball today is the J&J vaccine halt, although this, too, may be shrugged off as a minor setback.”

If reopenings remain on track, keep watching inflation.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

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