- About $21 billion have been pulled out of equity funds
- `I'm not panicked. I don't think this is a financial crisis.'
Not even the pessimists on Wall Street thought things would go so wrong so fast in 2016.
For the first time in 12 years, oil is below $30 a barrel. China is struggling to prop up its slowing economy and calm its volatile stock market. For the moment, the bears have the upper hand -- and January is only half over. As the Dow Jones Industrial Average sank 391 points on Friday, investors the world over seemed to be groping for any good news. While most money managers kept their cool, few offered assurances the U.S. market would bounce back soon, as it did after a similar bout of turmoil last August.
The selling has been intense, and European stocks officially entered bear market territory on Friday when the Stoxx Europe 600 Index closed down 20 percent from its record high in April. Now global equities have lost more than $14 trillion, or 20 percent, since June. The pace of the drop has been so fast it’s unraveled about half of the rally since a low in 2011. Investors have fled into the U.S. Treasury market, and pushed the yield on the 10-year note below 2 percent for the first time in months.
The triggers for the upheaval are familiar -- China and oil -- and the anxiety is the usual one.
“It comes down to one basic fear, which is the global economy,” said Russ Koesterich, global chief investment strategist for BlackRock Inc., which manages $4.5 trillion. “What people are afraid of is this isn’t investors overreacting, but reflects a fundamental deterioration in growth.”
No Bomb Shelter
For all that, there’s a hesitancy to view what’s going on as more than turbulence. “I’m not panicked. I don’t think this is a financial crisis,” said Jack Ablin, chief investment officer for BMO Private Bank, which oversees $68 billion. “I’m not of that camp that says sell everything and hide in a bomb shelter. This is all part of the re-valuation in the market.”
There’s a list of things that could change the zeitgeist. Central banks could step in. Consumers could start spending more of the money they’re saving on energy costs. Oil could, as oil often does, go back up. In fact, a report just out from Goldman Sachs Group Inc. predicts the crash in crude futures prices will turn the glut into a deficit by the second half of the year.
Growth in China -- where the benchmark Shanghai Composite plunged an additional 3.6 percent on Friday -- could always pick up, and there could be a signal next week when the government is expected to report that retail sales rose 11.3 percent in December.
And as more quarterly reports start coming out, the analysts could turn out to be wrong. “A good earnings season could turn things around here,” said Brian Jacobsen, chief portfolio strategist with Wells Fargo Funds Management LLC, which oversees $242 billion. “We just really need to get through this drop in sentiment, and get back to the fundamentals.”
The heads of some of the biggest American companies are certainly more optimistic. After reporting better-than-expected results Thursday, JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said on a call with analysts that the U.S. economy “looks pretty good at this point,” and that credit quality across card and commercial-lending businesses “is as good as it’s ever been.”
Still, there are more than enough statistics and predictions out there for the Cassandras. U.S. economic data is, on balance, falling short of expectations, according to Citigroup Inc.; its U.S. Economic Surprise Index, which measures where reports measure up to forecasts, has been negative since November.
Analysts have assembled the worst outlook for global corporate earnings in seven years. Debt investors are paying the most in three years to protect against defaults by North American companies. China burned a record amount of its foreign-exchange reserves last month to stem a plummet in the yuan. The Federal Reserve raised interest rates for the first time in nearly a decade, removing what some saw as an extra leg of support for global markets.
All that explains why more than $5 trillion has been erased from global equities in the most dismal start to any year on record. At Friday’s close, more than half of the 45 markets tracked by Bloomberg had entered a bear market decline of at least 20 percent from their recent peaks.
In the U.S., stocks are experiencing the second correction in five months. The Standard & Poor’s 500 Index has dropped 8 percent, marking the poorest beginning for a year in data going back to 1927, and the Chicago Board Options Exchange Volatility Index, a measure of investor fear known as VIX, surged 48 percent.
“The market is manic depressive,” Howard Marks, a co-founder of Oaktree Capital Group LLC, the world’s biggest distressed-debt investor, said in an interview on Bloomberg Television. “It swings from seeing only the positives to seeing only the negatives and from interpreting everything positively to interpreting everything negatively.”
It could be worse: While about $21 billion have been pulled out of equity funds in the past two weeks, the outflow pales in comparison to withdrawals of $35 billion during the August 2015 selloff and $90 billion in August 2011, back when the market was mired in the European sovereign debt crisis, data compiled by Bank of America show.