Text size

A Red Start. U.S. stocks ended solidly in the red on Tuesday, kicking off September with a loss. U.S. manufacturing activity declined in August, the first time in three years. The latest round of tariffs on U.S. and Chinese goods took effect over the Labor Day weekend and China lodged a complaint with the World Trade Organization against the U.S. Oil was falling ahead of OPEC’s meeting next week. In today’s After the Bell, we…

Factory Gloom

Stocks closed with losses on Tuesday as an unexpected decline in U.S. manufacturing activity made investors increasingly worry about the trade war’s drag on the economy.

The Dow Jones Industrial Average fell 285.26 points, or 1.08%, to close at 26118.02. The S&P 500 declined 20.19 points, or 0.69%, to finish at 2906.27, and the Nasdaq Composite lost 88.72 points, or 1.11%, to close at 7874.16.

Editor's Choice

The Institute for Supply Management’s manufacturing index declined to 49.1 in August from July. That’s well short of economists’ expectations for a moderate increase and fell below the 50 threshold for the first time in three years. A reading below 50 indicates that the manufacturing section of the economy is shrinking from the previous month.

The index is an important gauge of the health of the cyclically sensitive manufacturing sector, wrote Jim Baird of Plante Moran Financial Advisors in a Tuesday note. “Although [the index] had been trending lower in recent months, indicating that the pace of growth was slowing, its slippage into contractionary territory reflects the rising risk to not only the manufacturing sector, but the broad economy as well.”

Stocks in the S&P 500’s industrial sector were hurt the most following the news, slumping 1.3% during the first trading day in September. Industrial stocks Caterpillar (ticker: CAT) and 3M (MMM) fell 1.6% and 1.9%, respectively.

Ongoing trade tensions between the U.S. and China also pressured the markets as the latest round of tariffs on each other’s imports—announced earlier in August—took effect this past Sunday. On Monday, China lodged a complaint against the U.S. at the World Trade Organization over its latest tariff actions, claiming that the Trump administration has violated the consensus reached by leaders from both countries last year.

As the new tariffs kick in, companies with high exposure to China are feeling the pain. Chip stocks such as Qualcomm (QCOM), Nvidia (NVDA), and Advanced Micro Devices (AMD) fell 3.4%, 2.0%, and 1.8%, respectively, while shares of consumer-focused brands Tiffany (TIF) and Apple (AAPL) dropped 2.8% and 1.5%, respectively.

The outlook for manufacturing now largely hinges on the trade-war narrative, according to Baird. American companies new export and import orders have already been falling thanks to the existing tariffs, but the pace of decline has accelerated in August. “Risks have certainly increased as global growth has slowed, but the damage to business sentiment is growing as well,” he wrote. “At this point, it appears that conditions will likely worsen in the coming months.”

Indeed, the remaining batch of tariffs—announced in August but not expected to take effect until Dec. 15—haven’t been fully reflected in the stock prices yet. If implemented later this year as planned, the additional levies will likely weigh further on business activities in the manufacturing sector and push the U.S. economy into recession.

Write to Evie Liu at evie.liu@barrons.com