Investors’ anxiety has been on full display on the first day of trading for 2016
Updated Jan. 4, 2016 7:09 p.m. ET
There’s nothing quite like fireworks to ring in 2016. Global markets took a diveto start the first trading session of the year, sparked by a rout in Chinese equities. A weak economic indicator in the world’s second-largest economy helped push the Shanghai Composite Index down 6.9% before trading was halted. Several markets suffered around the world. Here are some of the factors at play:
1. China Is Huge
A Chinese manufacturing gauge fell last month to 48.2, from 48.6 in November. It isn’t much of a surprise, really. Caixin Media Co.’s manufacturing purchasing-managers index, released Monday, has spat out a reading below 50, which indicates contraction, for 10 consecutive months. But it is feeding investors’ fears after a tumultuous year in Chinese markets and persistent concern about China’s economic fate. The Shanghai Composite ended last year up 9.4%, but not before a 43% crash over the summer that temporarily wiped out $5 trillion of market value. As China seeks to fuel its decelerating economy with consumption-driven businesses, rather than manufacturing, small signals are producing outsize effects in markets.
“Much of what will be dictated in the marketplace hinges on whether China is successful in arresting its decelerating rate of growth,” said Mark Luschini, chief investment strategist at Janney Montgomery Scott.
2. Real Effects
One of the biggest decliners in Monday’s selloff was the Brazilian real, which fell as low as 4.06 to the dollar before recovering to 4.04. The reason: The South American nation’s largest trading partner is China, and further weakness may push Brazil deeper into recession this year.
3. Momentum
Facebook and Google parent Alphabet Inc., which added among the most points to the S&P 500 index last year, both dropped more than 2% Monday, trailing the broader market. The fact that stocks seemingly unconnected to China’s growing pains can fall in response demonstrates the level of anxiety out there, and how many other stocks could reverse last year’s gains. Amazon.com and Netflix Inc., the two best-performing stocks in the benchmark last year, which also received analyst downgrades Monday, fell 5.8% and 3.9%, respectively.
4. Junked
The debt markets tend to flash signs of economic concern before stocks do, and that is just how bond traders ended last year. The largest high-yield bond exchange-traded fund, the iShares iBoxx $ High Yield Corporate Bond ETF fell 10% in 2015 as junk bonds marked their worst performance since 2008. Equity traders in recent weeks have finally noticed.
5. What’s Next
The CBOE Volatility Index, which tends to climb as investors become more fearful about a drop in stocks, topped 20 on Monday, a rise of 11%. Investors are finding cause for concern coming out of the first year of losses for the S&P 500 index in the past four years. Byron Wien, a vice chairman at Blackstone GroupLP, predicted in his annual list of surprises on Monday that U.S. stocks would have another down year due to weak earnings, margin pressure and “investors keeping large cash balances because of global instability.”
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