U.S. equities tanked for the third consecutive week, down another 2%. Investors were socked by high volatility, and the Standard & Poor’s 500 index finished in correction territory—defined as a drop of 10% or more from highs—for the second time since last August.
Once again, the debacle was blamed on fresh fears about slowing global and Chinese economic growth and on the now more than 16-month old slump in oil prices. Crude fell 11% last week to $29.42 per barrel. In June 2014, it was $107. That continues to take a painful toll on both the energy stock sector, down 2% last week and 44% since mid-2014, and the broader market as well.
Bank stocks fell into a bear market last week—defined as a 20% drop or more from highs—as investors expect the Federal Reserve will slow down the pace of interest-rate hikes.
Last week, the Dow Jones Industrial Average fell 2.2 that was a 358-point fall for the Dow, to 15,988.08. The S&P 500 Index fell 42-points to 1880.33—and off 12% from highs. The NASDAQ fell 3.3%, to 4488.42.
The volatility caused by oil and China derives from the same investor concern: the state of domestic and global demand, says Peter Kenny, independent equity strategist at Kenny and Co. Last year, the slow-but-steady U.S. economy was the rock upon which the market’s high was built. Now, he adds, the latest U.S. numbers—whether gross domestic product, retail sales, or industrial production—seem to suggest a waning economy.
Kenny says he is cautious near-term, adding “It’s not unreasonable to think we’ll flirt with a bear market.” Some sectors are already there, such as bank stocks and small companies. For the bull to return, the market needs demand to improve, the Fed to hold off, and oil to stabilize, he says.
He’s not alone: “Without an improvement in oil prices and energy stocks, it becomes very difficult for this market to rally,” adds JonesTrading market strategist Yousef Abbasi.
Normally, a Monday holiday would be welcome after such a week, but Abbasi notes a slew of Chinese data will be issued next week, including GDP and industrial production on Monday evening in the U.S. “If it’s light, it could send global demand expectations lower again.” The fourth-quarter earnings report season will be in full swing next week, too.
Friday, December industrial production fell for a third straight month, the Fed said, off 0.4% from November, and dragged down by utilities and mild weather. It was worse than the -0.2% consensus.
Not everyone is gloomy. David Kelly, chief global strategist at JPMorgan Asset Management says he expects the market turmoil to last two weeks or so, adding investors shouldn’t succumb to emotional reactions during these violent swings. The correction needs fuel to keep going, he says, but the state of China, oil prices, the U.S. economy, corporate earnings, and equity valuations don’t support the downdraft.
(Source: Barrons Online)