S&P 500 Corrects, Oil Routed as Selloff in Risk Assets Deepens

El-Erian: This Is Not 1998 or 2008
  • China growth concerns torpedo emerging equities, commodities
  • S&P 500 sinks 7% in worst two-day slide since December 2008

American stocks provided no refuge from the rout in all but the safest of global assets, as the Standard & Poor’s 500 Index sank into a correction.

The S&P 500 plunged 3.9 percent in a seesaw session that saw the gauge erase more than four-fifths of a 5 percent slide before it succumbed in afternoon trading. The index finished 11 percent below its May high, meeting the definition of a correction for the first time since 2011.

The rout pushed the S&P 500’s two-day bludgeoning to 7 percent, the most since the height of the financial crisis, amid the worsening global selloff that saw Chinese shares sink the most since 2007 and stocks in Germany fall into a bear market. Commodities slid to a 16-year low as Brent crude plunged below $45 a barrel for the first time since 2009. The yen strengthened the most since 2010 and 10-year Treasury yields slid to an April low.

“Investors in China have lost confidence in the central bank, and it’s a very alarming and difficult situation for the markets,” said Bruce Bittles, chief investment strategist at Milwaukee-based Robert W. Baird & Co., which oversees $110 billion. “It ultimately depends on whether the China situation results in a severe economic slowdown. If that happens, it’s going to ripple through the U.S.”

China Root

China’s unexpected devaluation of the yuan on Aug. 11 sparked the biggest rout in U.S. stocks in nearly four years on concern that the slowdown in the world’s second-largest economy is worse than anticipated. The slump in Chinese equities torpedoed emerging-market assets and sank commodities from oil to metals.

The Chicago Board Options Exchange Volatility Index jumped 45 percent to 40.74, the highest level since October 2011. The gauge known as the VIX more than doubled last week, soaring 118 percent to 28.03. About 14 billion shares traded on U.S. exchanges, the most in more than four years and the second-highest value traded ever, according to Ana Avramovic, a U.S. strategist at Credit Suisse Group AG.

“Everyone seems to be selling off, and there’s panic,” said Michael Woischneck who helps oversee the equivalent of $7.1 billion at Lampe Asset Management GmbH in Dusseldorf, Germany. “There’s no rational choice anymore, no rational reaction.”

The Dow Jones Industrial Average lost 588 points, or 3.6 percent, in a day of violent swings. The gauge plunged almost 1,100 points in the first five minutes of trading before roaring back to trim its loss to less than 300 points. The Nasdaq 100 Index sank nearly 10 percent at the open, only to close lower by 3.8 percent.

European Rout

The selling in the U.S. was presaged by action in Europe and Asia. European stocks tumbled 5.3 percent, the most since 2008, while the MSCI Emerging Markets Index slid 5.1 percent, for a seventh straight loss. Basic-resource producers led losses as Brent crude broke below $45 a barrel. Ten-year Treasury yields fell to as low as 1.90 percent.

The rapidly spreading concerns over China’s growth come as the Federal Reserve considers its first interest-rate increase since 2006. Just before the close of trading in the U.S., Fed Bank of Atlanta President Dennis Lockhart said he continues to expect the first rate hike this year, while cautioning that a stronger dollar, the weaker Chinese yuan and falling oil prices complicate that outlook.

Fed funds futures now show a probability of a December rate increase at 44 percent versus 61 percent on Friday. Bets on the first increase in rates in almost a decade in September sank to 22 percent, down from 34 percent. The calculation is based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase.

The S&P 500’s rout sent valuations tumbling. The price-to-earnings ratio for the gauge sank to 16.7, the lowest level since the October pullback. Then, the measure bottomed just above 16.50, the cheapest since January 2014.

Value Creation

“It may overshoot in the near term to the downside, creating value for shareholders,” said Jeff Mortimer, the Boston-based director of investment strategy for BNY Mellon Wealth Management, which oversees almost $193 billion. “We are looking at those companies that don’t have as much international exposure,” and instructing portfolio managers to steer clear of large-caps.

Selling eased after the open, as investors sought opportunities among the biggest declines. Apple Inc. embodied the volatility in the broader market. The stock plunged 14 percent in early trading, only to erase that and gain as much as 2.9 percent before ending down 2.5 percent. Last week Apple stock plunged into a bear market as investors sold their most-loved holdings.

“As prices go lower, we see selective opportunities to buy as opposed to a provocation to become more bearish,” said Bruce McCain, chief investment strategist at Key Private Bank in Cleveland, the private-banking unit of KeyCorp that oversees more than $25 billion in assets. “We’re emphasizing large-caps relative to smaller ones” and within the U.S., companies that are less export-oriented, he said.

Some prominent money managers and forecasts said the selling has gone too far, too fast. Jonathan Golub, chief market strategist at RBC Capital Markets, says the bloodbath in biotechnology and tech stocks is temporary, and investors should buy back the best performers of 2015.

Birinyi’s Call

Laszlo Birinyi, the investor whose bullish calls have repeatedly come true since 2009, says that while the selloff lashing global equities is painful, its cause is no mystery -- and that’s a reason for optimism.

“When the issues are on the table, the market will do what it has to to adjust and come out OK on the other end,” Birinyi, the president of Birinyi Associates in Westport, Connecticut, said in an interview on Bloomberg Radio’s “Surveillance” with Michael McKee. “That other end may be a while, and it may not be fun getting there.”

Doug Ramsey, the chief investment officer of Leuthold Weeden Capital Management LLC, whose quantitative research into market breadth, valuation and investor sentiment foreshadowed the drubbing in American stocks last week, says the selling will worsen.

All but three of the shares in the Stoxx Europe 600 Index retreated Monday, driving the gauge down 5.3 percent. Germany’s DAX Index slid 4.7 percent, taking the decline from its April peak to more than 20 percent.

Shanghai Slump

Investors withdrew$1.9 billion from U.S. exchange-traded funds that buy in emerging-market stocks and bonds last week, the most since March.

In Asia, the Shanghai Composite Index slid 8.5 percent and Hong Kong’s Hang Seng Index fell 5.8 percent, extending its descent into a bear market. The measure trades about 25 percent below an April high, with a gauge of price momentum dropping to the lowest since the October 1987 stock-market crash.

The Shanghai Composite Index's gyrations since May. It's now at a six-month low
The Shanghai Composite Index's gyrations since May. It's now at a six-month low
Bloomberg

“This is a real disaster and it seems nothing can stop it,” said Chen Gang, Shanghai-based chief investment officer at Heqitongyi Asset Management Co.

Greater China equities plummeted, with Taiwan’s benchmark gauge dropping as much as 7.5 percent. More than $4 trillion has been wiped from the value of Chinese equities from June 12 through Friday.

Commodities Slide

The Bloomberg Commodity Index fell 2.2 percent to its lowest closing level since August 1999.

Brent and West Texas Intermediate crudes both settled at six-year lows of $42.69 and $38.24 a barrel respectively. Gold, a haven for investors during volatile trading, was little changed at $1,155 an ounce.

Currencies of basic resource-producing countries led declines, with the ruble tumbling 2.6 percent to 70.90 per dollar and Malaysia’s ringgit sliding 1.8 percent to a fresh 17-year low. South Africa’s rand dropped 2 percent and New Zealand’s currency weakened 3 percent. Turkey’s lira retreated 0.8 percent as the deadline for forming a coalition government passed, putting the country on course for its second parliamentary election this year.

The yen advanced with the euro as Treasuries rallied amid speculation the global selloff will forestall the Federal Reserve’s first interest-rate increase since 2006.

Japan’s currency jumped 3 percent to 118.41 per dollar, touching its strongest level since January and the euro climbed for a fourth day against the dollar, strengthening past $1.15 for the first time since February.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE