A Wal-Mart store

NEW YORK — Investors had a grab bag of bad news to use as reasons for a third day of stock dumping.

Concerns included financial market woes in China; weaker-than-expected gross domestic product growth in the U.S. (partly due to slowed manufacturing activity and lackluster consumer spending in certain market segments); crude oil price instability; an unconfirmed nuclear test by North Korea; minutes from December’s Federal Open Markets Committee meeting that revealed competing views on the strength of the U.S. economy, and overall concerns about a softening global economy.

A narrower U.S. trade deficit also spooked investors.

As a result, the Dow Jones Industrial Average lost 252 points, or 1.5 percent, to close at 16,906. Including Monday’s market rout, the Dow has lost 519 points since the first trading day of 2016. The S&P 500 dropped 1.3 percent to finish at 1,990 while the Nasdaq fell 1.1 percent to 4,835. Earlier in the day, major indices in Asia and Europe also closed deep in the red (see chart below).

Retail stocks had another difficult day. The S&P Retailing Industry Group Index shed 0.7 percent to close at 1,245. Most stocks closed the day down with declines of 1 to 3 percent. Stein Mart Inc. fell 9.5 percent to close at $6.80 while Stage Stores Inc. lost 4.4 percent to finish at $8.80. Other notable decliners included Macy’s Inc. with a 2.2 percent drop to $36.14 (although it rose 3.8 percent in after-hours trading despite the retailer revealing dismal comparable-store sales results for November and December) and Men’s Wearhouse with a 6.4 percent decrease to $13.43. Avon Products Inc. lost 6.3 percent to $3.43.

Gainers included Wal-Mart Stores Inc. with a 1.1 percent increase to $63.60, and Kohl’s Corp. with a 0.5 percent increase to $50.05.

Wednesday’s global market decline was triggered by a falling yuan in China that lifted stocks there and resulted in the Shanghai Index closing with a 2.3 percent gain. Shanghai was the only major index that closed the day in the green. Stifel, Nicolaus & Co. economists said since last July, the yuan is down more than 5 percent, but some viewed the drop as dire.

Meanwhile, Evercore ISI analysts warned clients that issues in China would continue to erode U.S. stocks. “China’s ill-fated decision to prop up stocks and let their currency collapse is a Titanic error in judgment with broadly bearish cross asset implications for the rest of the world,” the analysts said in their report. “With the macro backdrop more vulnerable today than at any time since the financial crisis, and the S&P 500 and Nasdaq still near all-time highs, we anticipate a downside move to 1,900 on the S&P within the first two months of the year.”

In a Goldman Sachs report from several months ago, the firm calculated the share of revenue from China for all of the S&P 500 firms is about $170 billion, which is just 2 percent of the total revenue. So why is China’s financial condition a linchpin for the global equities market?

The answer is that China is a key part of all of the global, emerging markets, which need to be healthy to sustain developed markets. David A. Levy, chairman and economic analyst at Jerome Levy Forecasting Center LLC, said in a recent research note that emerging markets are “now nearly half of the world economy and most of the developed markets’ economy beyond U.S. borders [are] heavily dependent on [emerging markets]’s foreign demand and financial stability.”

In his markets briefing report, Nicholas Colas, chief strategist at Convergex Execution Solutions LLC, said “There’s an old piece of trader lore that says, ‘so goes January, so goes the year.’ If that holds true, it means 2016 is going to be much more eventful than the last few years.”

On Colas’ list of trends to watch is the price of crude oil, and whether there is a bottom. Presidential elections, geopolitics (to include potential terror attacks) and ongoing equity market volatility will also impact stock prices this year. Interest rate hikes are also of interest, and Colas said the market is expecting four increases of 25 basis points each.

 

Index % Change
U.S.
Dow Jones Industrial Average -1.5
S&P 500 -1.3
Nasdaq -1.1
S&P Retailing Industry Group -0.7
Europe
FTSE 100 -1.1
DAX -0.9
CAC 40 -1.3
FTSE MIB -2.7
Asia
Asia Dow -1.4
Hang Seng -1.0
Shanghai +2.3
Singapore -1.1
Nikkei 225 -1.0

 

 

 

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