Stock Market Is Dropping Again Today. What’s Behind Its Worst Slump Since July.

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The

S&P 500

is on pace for its worst three-day drop since July. Is the sky starting to fall?

It sure does look ugly out there. S&P 500 futures have declined 0.6% Thursday morning, indicating an opening loss of around 28 points, or 0.6%, for the index. The

Dow Jones Industrial Average,

meanwhile, could be headed for a 237 point, or 0.7%, decline, per futures markets.

If the losses hold, it would be the S&P 500’s third consecutive drop, the index’s longest losing streak since the three-day losing streak that ended on July 19. At this pace, the index would shed around 2.4% over a three-day period, also the worst since that July tumble.

If you want reasons for the decline, well, there are plenty. Taper fears are at the top of the list, despite the fact that the Fed has been about as transparent about the fact that it will end its bond-buying program soon as it’s possible to be. (Can a big article in The Wall Street Journal with the headline “Fed Officials Weigh Ending Asset Purchases by Mid-2022” be any more obvious?)

But history shows that markets react to changes in monetary policy—even when they know the change is coming, says Bleakley Advisory Group’s Peter Boockvar. “[We] have to be reminded of how stocks responded to EVERY SINGLE change in Fed policy towards tightening since 2010,” he writes. “Outside of the August 2015 selloff related to the Chinese yuan modest devaluation and the Covid induced crash, every notable correction in stocks surrounded a change Fed policy toward tightening.”

Covid concerns continue to rise, whether its cases forcing shutdowns in New Zealand or reports that the vaccines aren’t as effective against the Delta variant as originally thought. Again, none of this is terribly new, but then again, the market chooses when it wants to react, not folks with a keyboard.

If you listen to the thrum of the Street, though, you get the sense that the market has been due for a correction. There’s some truth to that. The S&P 500 has been more than 8% above its 200-day moving average for 198 days, the longest in 40 years and among the five longest stretches in history. These streaks are usually followed by a couple of months of choppy trading, with a median gain of just 0.3% over the following two months. “By the time it reached the current length, other super-strong trends saw buyers take a break,” writes Sundial Capital Research’s Jason Goepfert.

Of course, it might just be August, says DataTrek’s Nicholas Colas. He notes that the S&P 500 typically has one 1% up or down move every week since 1957, but has had just three during the first seven weeks of the third quarter. August, because of its low volume and history of higher volatility would be a good time to catch up.

That’s especially true with stocks starting to move together again. “[As] much as we like U.S. equities, we have to respect both the tape (suddenly higher correlations) and seasonality (late August volatility),” Colas writes. “Both tell us to be cautious over the next 2-3 weeks.”

So buckle up. Whatever the reason, it’s chop time for U.S. stock markets.

Write to Ben Levisohn at ben.levisohn@barrons.com