- The MSCI All-World Index falls 20% from its May 2015 record
- Retreat is biggest since selloff during 2011 Europe crisis
The yearlong decline in global equities that started with a selloff in energy became a full-blown bear market Thursday as a rout in bank shares extended losses in the broadest worldwide gauge past 20 percent.
The MSCI All-Country World Index slipped 1.3 percent, pushing its decline since May to 20 percent and marking the biggest retreat from risk since Europe’s sovereign debt crisis in 2011. Every industry has fallen since last year’s record high with decreases exceeding 25 percent in financial stocks and 30 percent in energy and commodities.
Selling from Tokyo to Frankfurt and New York is torpedoing one of the biggest expansions in share prices of the last century, particularly in the U.S. where the Nasdaq Composite Index has fallen 18 percent since July and the Standard & Poor’s 500 Index is about 125 points from its own bear market. Investors are running for cover amid concern the rout in oil prices will destabilize credit markets and saddle banks with losses.
“It’s very concerning,” Paul Karos, the equity head at $3.85 billion Whitebox Advisors, said by phone. “It all began in the industrial economy and now the big thing has been earnings estimates that people thought in 2016 would have a nice recovery. As we get into earnings this year we see that corporate profit is in question and we don’t have that same degree of confidence.”
Only once in seven years have global stocks teetered as precariously as they are now. The MSCI gauge fell more than 24 percent between May and October of 2011 as Europe sovereign crisis raged and S&P stripped the U.S. of its AAA credit rating. The latest decline trims an advance that from March 2009 to its height last May added about $47 trillion to equity values globally.
Equities markets have been buffeted by everything from China’s slowdown to the selloff in oil and rising U.S. interest rates, sending them to the worst start to a year on record. The rout in the oil industry is rippling through financial markets amid growing signs that credit quality is worsening. U.S. bonds are now indicating the slowest inflation since May 2009 as investors pile into haven assets.
In a departure from past bouts of global weakness, global markets this year are getting little help from the U.S. The world’s biggest economy was sluggish enough to keep Janet Yellen’s Fed from hiking rates until December, and now corporate earnings are eroding. The spread between an index tracking global stocks outside the U.S. and the MSCI All-Country index is now the smallest since Aug 2015.
U.S. stocks extended their slide Thursday as the Dow Jones Industrial Average plunged more than 250 points as shares of financial and raw-material companies lost at least 2.2 percent. Comments by Fed chair Yellen that market turbulence could weigh on the outlook for the economy didn’t assuage investors as the S&P 500 plunged as much as 2.3 percent during Yellen’s testimony to Congress.
With the U.S. fourth-quarter earnings season more than halfway done, just 52 percent of companies in the S&P 500 reported profit growth in the fourth quarter. While energy companies and materials shares have led the decline, all but three sectors reported shrinking profits. Analysts estimate earnings at companies in the gauge fell 4.5 percent in the fourth quarter, and will drop another 6.3 percent in the current period.
Still, equity gauges in the U.S. have held up compared with other developed markets. The S&P 500 has lost 11 percent in 2016, compared with declines of at least 18 percent in German stocks and the Euro Stoxx 50 Index. In Asia, the Shanghai Composite Index is down 22 percent on the year and Hong Kong’s Hang Seng index has erased 15 percent.
That’s not to say the rest of the world is doing better. Prospects for profit growth are dwindling, according to monthly data from Citigroup Inc.’s Earnings Revision Index, which tracks changes in analyst estimates for corporate profits. Cuts to those estimates outweighed upgrades by the most since 2009 last month. The gauge shows analysts have expected more cuts than upgrades since August 2014.
While energy and materials shares have led equities downward with declines of at least 31 percent, pain has been felt everywhere. All 10 primary groups in the MSCI All-Country index have declined since the index touched a high in May 2015, with financial companies, consumer discretionary and tech shares adding onto losses in 2016.
“Energy led the whole entire market lower and with those companies going chapter 11 or trading at 50 cents on the dollar, now it’s looking at what’s next and the macro environment doesn’t seem great,” Brian Frank, portfolio manager at Frank Capital Partners LLC, said by phone. “There’s a flight to safety.”