Market Digest – Week Ending 1/7
Investors were greeted with a rude welcome to 2016. The S&P 500 lost 6% for the week, its biggest decline since 2011 and the worst starting week to a year on record. As in August, surprise currency devaluation by China sparked selling in Shanghai which spread around the world. The Shanghai Composite finished the week down 10%. Brent Crude fell below $33. On a positive note, the US delivered a strong jobs report on Friday. Official unemployment remains at 5.0% as more workers entered the labor force. Bonds rose as investors sought safety.
S&P 500: 1,922 (-6.0%)
FTSE All-World ex-US: (-6.8%)
US 10 Year Treasury Yield: 2.12% (-0.15%)
Gold: $1,104 (+4.1%)
USD/EUR: $1.092 (+0.5%)
• Monday – GM invested $500 million in Lyft and said the two would work together on plans for driverless on demand cars.
• Tuesday – Weak Chinese manufacturing data and a falling yuan prompted a rapid sell-off in Chinese equities, which were halted after a 7% drop. Unclear comments from regulators related to the removal of a selling ban on large shareholders also drove selling pressure.
• Thursday – US oil prices dropped to $33.27, the lowest since February, 2004.
• Thursday – North Korea tested a nuclear weapon, and claimed it was a hydrogen bomb.
• Friday – The US announced a stronger than expected jobs report. Employers added 292,000 jobs, with average wages up 2.5% from a year ago.
It was an ugly way to start the year. China is the story right now, and things do not look pretty. The numbers are heavily manipulated by the government, so it is always very difficult to know what is really happening in China, but soft manufacturing data and the further weakening of the currency suggests the feared “hard landing” is more likely than many thought. Commodity prices are already below where many producers can make money, and emerging markets stocks are priced 20% lower than they were ten years ago. So a lot of the bad news still to come out of China may already be baked into asset prices.
Either way, volatility is back. After years of tranquil markets, we got a taste of volatility in August but it went away just as quickly as it came. Most likely we will have to learn to grow re-accustomed to it. Volatility is uncomfortable but is not a bad thing. The last few years have been unusual. More rapid gains and losses in stocks are the norm, and it is the risk from that uncertainty that allows owners of stocks to generate superior returns over time. Hold on – but don’t panic.