Global stock sell-off: Dow plunges more than 400; S&P back below 2,000
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Chinese, European and American stock markets dropped at the opening of the year. USA TODAY
Stocks around the world plunged on the first trading day of 2016, with the broad U.S. stock market suffering its worst opening day loss in 15 years amid fresh signs of slowing growth in China, the world’s second-biggest economy.
So much for a fresh start on Wall Street as stocks tumbled following a lackluster 2015, when the Standard & Poor’s 500 stock index closed down 0.7%, its first down year since 2008.
2016 is off to a rocky beginning as many of the same worries and headwinds that held stocks back last year have reappeared at the start of the new year, prompting investors to sell stocks and reduce risk.
“New year but same old problems for investors—worries about growth prospects in China, instability in Middle East, and on-going concerns related to weak growth among emerging markets,” said Joe Quinlan, chief market strategist at U.S. Trust. “For 2016, investors should brace for a volatile grind across most asset classes.”
The Dow Jones industrial average, which declined 2.2% in 2015, is down about 350 points, or 2%, to 17.076, after earlier falling nearly 470 points and back below 17,000 for the first time since Oct. 14. The Standard & Poor’s 500 stock index tumbled 2%, recovering slightly from earlier losses that sent it back down below the key 2,000 mark. The S&P is on track for its third worst opening day ever, right behind a 3.7% plunge on the first day in 1932 and a 2.8% loss in 2001.
The tech-heavy Nasdaq composite plunged about 130 points, or 2.4%. The yield on the 10-year Treasury note dropped to 2.23% from 2.27% Friday.
"It’s looking to be an ugly start to the new year," said Josh Selway, analyst at Schaeffer's Investment Research.
Like last year’s big scares, China is again the epicenter of investor angst to start 2016.
A weaker-than-expected reading on Chinese manufacturing that showed continued contraction in one of the world’s most important economies raised fresh fears about the global growth outlook for 2016 and the profit outlook for companies around the globe. It also sparked a massive stock market sell-off in mainland China, where shares tumbled more than 7%, forcing authorities to halt trading for the day before the normal closing time.
It was the worst start to the year for China stocks ever, according to Bloomberg, and the Shanghai composite’s worst one-day drop since a 7.6% decline on Aug. 25, 2015.
The steep drop of mainland China's shares "brings back dark memories of collapses experienced last summer" amid similar tumult in China, Paul Hickey of Bespoke Investment Group told clients in a report.
But Quinlan of U.S. Trust says “it is critical for investors to understand that the stock market doesn't accurately reflect the underlying strengths of the real economy in China.”
Under a new market “circuit breaker” rule in China established last year, which is designed to slow down markets and halt panic in the event of moves of 5% or more, the CSI 300, a large-company stock index in mainland China was halted for 15 minutes in mid-afternoon trading Monday after diving more than 5%. But when shares headed lower once again just minutes after the initial trading halt, and losses for the day swelled to more than 7%, the new circuit breaker rules kicked in, prompting an early shutdown of mainland China’s stock market on its first trading day of 2016, according to Bloomberg.
Fresh data on U.S. manufacturing added to investor fears about a global economic slowdown. An index of U.S. factory activity fell to 48.2 from 48.6, the Institute for Supply Management said Monday. That’s the lowest level since June 2009 and the second straight month of reading below 50, signaling contraction in the sector.
Adding to the worries in the world’s financial markets is rising tensions between Saudi Arabia and Iran. Saudi Arabia announced Sunday that it was severing ties with Iran, hours after Iranian protesters set fires in the Saudi Embassy compound in Tehran. Tensions between the Middle East powers have intensified since the Saudis announced the execution Saturday of Sheik Nimr al-Nimr, a beloved cleric among Shiite Muslims known as a voice for free Saudi elections during the Arab Spring protests.
One bad day — even if it’s the first day of a new year — doesn’t mean the stock market returns will be horrific for the full year, adds Bill Hornbarger, chief investment strategist at Moneta Group.
“The first day of the year is not a predictor of the full year but watch the first five days (if they are positive) and then the month,” which have a better track record of predicting how the full year will play out, says Hornbarger.
Stocks around the globe got clobbered. In Asia, Mainland China’s Shanghai composite closed down 6.9%. And Hong Kong’s Hang Seng index fell 2.7%. Japan’s Nikkei 225 lost 3.1%.
And the selling that began in Asia spread quickly and painfully to Europe. Shares of Germany’s DAX index, which is filled with stocks that export goods to China, was down 4.3%. The CAC 40 in Paris was off 2.5% and the broad Stoxx Europe 600 was 2.5% lower.
China, which was among the big market drags in 2015, was also on Wall Street’s list of potential risks again in 2016. Like last year, any signs of a more pronounced economic slowdown in China is a risk to global stocks, including U.S. shares, Wall Street pundits noted in their 2016 forecasts.
Today’s major sell-off in mainland China stocks is reminiscent to the summer swoon last year in China that engulfed shares on Wall Street, sending U.S. shares back in August to their first 10%-plus dive in nearly four years. After a massive run-up early in 2015, the Shanghai composite stock index made waves with attention-getting, crash-like selloffs, including a nearly 6% one-day drop in early July and an even bigger 8.5% plunge in late July, its worst since 2007. The big scare last year, however, came on Aug. 8, when Beijing officials surprised global markets when it devalued its currency, the yuan, in an attempt to stimulate its ailing economy. The move exacerbated fears of a more serious slowdown.
Tensions in the Middle East lifted prices of U.S.-produced crude up 37 cents, or 1%, to $ 37.41 per barrel. U.S. crude fell 30% in 2015.
#MARKETS16: Stock picks | 10 things | Key questions | Bull or bear?
Contributing: John Bacon, Paul Davidson
Adam Shell on Twitter: @adamshell.
U.S. stocks are starting the new year with lots of volatility. Stocks in China fell so sharply that trading was halted. The sell-off came after disappointing manufacturing numbers in China. Newslook
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