Week of January 11, 2016
2016 started off with more than fireworks and clinking champagne flutes as the first trading day of the year saw record-breaking volatility on the downside. Geopolitical events, a new low in oil and more evidence of slowing global growth conspired to push markets even further into the red.
The Dow Jones Industrial Average closed down 6.2% for the week while the S&P 500 and the Nasdaq Composite were down 6% and 7.3%, respectively. International markets didn’t fare much better with European equities down 3.3% and Chinese markets, regaining some ground, still ended the week down a staggering 7%.
Off to a Rocky Start
The Dow Jones Industrial Average, sliding on negative news from China, fell more than 450 points at its intraday low for the first trading day of 2016, breaking an 84 year-old record in the process. The index rebounded slightly to end the day down 275 points. To prove the old adage “misery loves company,” the Dow Jones Industrial Average, S&P 500 and Nasdaq Composite all had their worst 5-day start of a year in history. Interestingly enough, some of the worst performers for 2015 were the best performers on the first day of 2016. Chesapeake Energy, Consol Energy and Southwestern Energy were down 77%, 76% and 74% respectively for 2015. However, they were up 10%, 8% and 8% respectively on January 4th to lead the small contingent of securities posting positive returns that day. While negative news from China continued to plague the equity markets and weigh on investor confidence, there was some positive news in the US as the jobs report showed 292,000 jobs were created in December as compared to the 200,000 estimate.
China’s Economic Slowdown
China’s economy once again grabbed headlines. As a country, they produced 58% of global output in 2015 and, according to the International Monetary Fund, China has been the source of nearly 35% of global growth in the last five years. So, any slowdown in an economy of this size tends to quickly spread to the global markets. The figure investors were so focused on was the government’s release of the purchasing managers’ index, a common measure of growth in an economy, which came in at 49.7. A reading above 50 implies a growing, healthy economy while a number below indicates a contraction. Chinese equities, as measured by the Shanghai Composite Index, fell 10% for the week and the government intervened numerous times to halt trading. In one instance, on Thursday, the market was only open for 30 minutes before the government stopped trading for the day as investors saw the Shanghai Composite Index fall 7% during that time. This was the shortest trading day for Chinese equities in the past 25 years. China’s currency, the yuan, is already down nearly 2% relative to the US dollar for the year and investors are pulling capital out of Chinese markets in retaliation. The People’s Bank of China is under greater pressure to let the currency depreciate by as much as 10-15%. The central bank has been buying billions of yuan in order to support its currency; however, the current policy of slow, measured devaluations is seen by many as a disrupting rather than stabilizing factor.
Another Low for Oil
Brent Crude, the international benchmark for oil, fell below $34 per barrel this past week, exceeding its low last month despite a short-lived rally in December and creating new 12-year low. This also marks a 70% drop from 2014 and the lowest price for the commodity since 2004. Concerns over excess supply and the evidence of slowing growth in China, the world’s second largest consumer, continue to plague the markets. Turning towards the Middle East, OPEC members have historically made room for new producers to keep prices high and supply constrained. However, with the rhetoric heating up between Saudi Arabia and Iran, any near-term cooperation from member-states appears to be remote and is leading any analysts to adjust their 2016 oil forecast downwards.
Fun Story of the Week
Scientists in Russia, America and Japan have discovered four super-heavy chemical elements that were verified on December 30, 2015 by the International Union of Pure and Applied Chemistry, a US-based, global organization that oversees chemical terminology and measurement. These elements were the first to be added since 2011 and finally complete the seventh row of the periodic table. The union is in the process of formally naming the elements; however, for the time being, the four manmade elements will temporarily be called ununtrium (element 113), ununpentium (element 115), ununseptium (element 117) and ununoctium (element 118). According to the guidelines, elements can be named after a mythological concept, a mineral, a place or country, a scientist or a property of the element in question. They were discovered when the scientists smashed lighter atomic nuclei into one another and tracked their radioactive decay. Similar to other super-heavy elements near the bottom of the periodic table, these only exist for a fraction of a second before they deteriorate into other elements.
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* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments may be appropriate for you, consult with your financial advisor. * The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. * The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors. * The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index. * Shanghai Composite Index which is a stock exchange in China that tracks all stocks (A shares and B Shares) that are traded on the Shanghai Stock Exchange. * Indexes are unmanaged, statistical composites and their returns do not include payment of any sales charges or fees an investor would pay to purchase the securities they represent. Such costs would lower performance. It is not possible to invest directly in an index. * Past performance does not guarantee future results. * Charts and graphs should not be relied upon as the sole basis for any investment decision and are for general informational purposes only. * Consult your financial professional before making any investment decision. * This newsletter was prepared by CWM, LLC. * Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
Sources:
CNBC, January 2016, http://www.cnbc.com/2016/01/05/something-pretty-strange-happened-in-the-market.html
CNBC, January 2016, http://www.cnbc.com/2016/01/08/us-markets.html
Financial Times, January 2016, https://www.ft.com/intl/cms/s/0/75ff717e-a996-11e5-955c-1e1d6de94879.html#axzz3wPUg5lii
Financial Times, January 2016, https://www.ft.com/intl/cms/s/0/03cb613c-b042-11e5-993b-c425a3d2b65a.html#axzz3wI32ljak
Wall Street Journal, January 2016, http://www.wsj.com/articles/global-stocks-pressured-by-north-korea-china-1452071295
Financial Times, January 2016, https://www.ft.com/intl/cms/s/0/06f747ac-b45e-11e5-b147-e5e5bba42e51.html#axzz3wPUg5lii
The Guardian, January 2016, http://www.theguardian.com/science/2016/jan/04/periodic-tables-seventh-row-finally-filled-as-four-new-elements-are-added
CNBC, January 2016, http://www.cnbc.com/2016/01/05/oil-prices-edge-higher-after-dropping-to-near-11-year-lows.html
CNBC, January 2016, http://www.cnbc.com/2016/01/06/us-crude-edges-away-from-2009-lows-storage-glut-weighs-on-outlook.html
Wall Street Journal, January 2016, http://www.wsj.com/articles/global-stocks-gain-some-respite-1452243425