In my many years of analyzing the financial markets, I’ve come to learn that the market’s reaction to the news, as opposed to the news itself, is often the most important indicator to Wall Street’s mood.

Investors this year have generally remained in good spirits, with stocks repeatedly hitting new highs. However, the spread of COVID Delta, rising inflation, and geopolitical turmoil are darkening those spirits.

Notably, retail sales took an unexpected dip in July, the Commerce Department reported Tuesday. Sales fell 1.1% last month on a month-over-month basis, worse than the consensus estimate of a decline of 0.3%. The main culprit was the deadly spread of Delta. Motor vehicles registered the biggest decline (see chart).

On an optimistic note, although July retail sales saw a monthly decline, they still posted a 15.8% jump on a year-over-year basis.

Nonetheless, investors reacted negatively. On Tuesday, the Dow Jones Industrial Average plunged 282.12 points (-0.70%), the S&P 500 fell 31.63 points (-0.71%), and the tech-heavy NASDAQ declined 137.58 points (-0.93%). Retail bellwether Home Depot (NYSE: HD) tumbled 4.27%, after reporting a second-quarter same-store sales miss.

In futures trading Wednesday, stocks were mixed, with the NASDAQ attempting to mount a comeback as bargain-hunters came to the fore.

Also on Wednesday, another retail bellwether, Target (NYSE: TGT), announced Q2 operating results before the opening bell that beat expectations on the top and bottom lines. Target is one of the few major retailers that hasn’t seen a slump in sales because of the Delta variant.

A harbinger of possible trouble ahead is the recent sharp drop in consumer confidence. The University of Michigan on Monday released its preliminary survey of consumer sentiment for August. The index fell from 81.2 in July to 70.2 this month. The losses in early August were broad-based across all regions and income, age, and education segments.

The optimistic spin would be that the plunge in consumer sentiment is temporary, caused by the spike in Delta cases, and confidence should return in the fall as schools reopen and vaccinations pick up the pace.

To be sure, the economy has transitioned from recovery to expansion. In a separate report Tuesday from the Federal Reserve, industrial production in July rose 0.9% on a month-over-month basis, exceeding the consensus expectation of 0.5%. Manufacturing output increased 1.4%.

There are plenty of encouraging economic trends to offset the negative news: robust corporate earnings growth, low unemployment, low interest rates, surging home values, and rising wages.

Corporate cash hoarding is another positive factor. The run-up in stock prices since the November 2020 election has filled the coffers of corporate giants with huge piles of cash. This trend could be construed as a contrarian indicator that reflects a defensive posture. But analysts expect companies to use that cash for stock buybacks and to fuel organic growth.

Indeed, Target announced Wednesday that its Board of Directors has authorized a $15 billion share repurchase program.

Read This Story: Corporate Cash Hoards Buoy Stocks

Companies also are putting that money to work by going on a merger and acquisition (M&A) spree. M&A activity hovers at historic highs. Giant firms are using M&A transactions as a way to counterbalance increasing uncertainties, such as the mutating pandemic.

Geopolitics has emerged as an unexpected wild card. Some pundits argue that the collapse of the government in Afghanistan is an epic U.S. blunder that will reverberate throughout the already tense Middle East. Others argue that America’s 20-year effort in that country was doomed to fail anyway, and it was time to stop wasting money and human lives on a lost cause. Regardless of who’s right, Wall Street’s response to the chaos in Kabul has been muted.

If anything, tensions in remote parts of the world like Afghanistan can be a boon for certain sectors, such as aerospace/defense. Makers of pilot-less drones, in particular, are reporting robust growth in Pentagon contracts.

Focus on the fundamentals…

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John Persinos is the editorial director of Investing Daily. Send your questions or comments to mailbag@investingdaily.com. To subscribe to John’s video channel, click here.