U.S. stocks tumbled to start 2016, as a rout in Chinese equities renewed concern that an economic slowdown there will damp global growth.
Investors returning to the market after the New Year holiday are facing a selloff that spread from China to Europe, and a reminder of the worries that dragged down stocks in August.
The Dow Jones Industrial Average tumbled 276 points on the day to close at 17,148, down around 1.6%. The S&P 500 closed down 1.5% at 2,012, marking its worst start to a year since 1983, as banks and health care shares led declines.
“It's been a bit of a hectic start to the year,” said Mike Sorrentino, chief strategist at Global Financial Private Capital.
(More: SEC report revisits sting of unsolved Aug. 24 market slide)
TRADING HALTED
“We've had a number of negatives out there in the U.S., and China is a reminder that there aren't many things to be bullish about going into this year,” said Michael O'Rourke, chief market strategist at JonesTrading Institutional Services LLC in Greenwich, Connecticut. “The three catalysts to the bull market were economic recovery, earnings recovery and accommodative policy and while the economy has gotten better, we've lost the other two.”
Trading was halted in China after a 7% drop in the CSI 300 Index of large-capitalization companies listed in Shanghai and Shenzhen amid deteriorating manufacturing data. Chinese policy makers, who went to unprecedented lengths to prop up stock prices during a summer rout, are trying to prevent financial-market volatility from weighing on economy set to grow at its weakest annual pace since 1990.
“We know bad stuff is going to happen. If you overreact to something like this China situation, you will jump out of the market at the worst possible time,” said David Edwards, president of Heron Financial Group.
CHINA SLOWDOWN
Mr. Sorrentino has a bullish market outlook, but expects volatility to continue through the year based on contributing factors, such as China's economic transition, that likely won't dissipate anytime soon.
“This is [China's] move from a manufacturing to a more consumer-driven economy,” Mr. Sorrentino said. “That's not going to get executed fully in three months. That's a several-year process.”
Lisa Kirchenbauer, president of Omega Wealth Management, also anticipates an environment of continued volatility, given competing monetary changes in the U.S. and Europe, the wildcard of China's economy and the upcoming U.S. presidential election.
“It really does feel like we are overdue for a correction, but the trick is that running to bonds during an interest rate hike may not be the complete answer,” Ms. Kirchenbauer said. “Diversification will be key and holding cash reserves for short-term cash needs will be important.”
INVESTOR SENTIMENT
S&P Dow Jones Indices data indicate the first day of trading has no predictive power for the rest of the year. The index ends the year in the same direction it takes on the opening day 50.6% of the time, the data show. The first month of the year has proved more telling — the gauge's return in January determines its direction for the year 72.4% of the time.
After scaling new peaks and enduring its worst selloff in four years, the main U.S. equity index ended 2015 0.7% lower. Investor sentiment wavered last year between optimism that the economy was strong enough to handle higher borrowing costs and concern that China's slowdown will hurt global growth, which exacerbated weakness in commodity prices and raw-material stocks.
The beginning of 2015 was also rocky, with the benchmark index dropping 2.7% in its first three sessions, followed by a two-day, 3% rally before eventually finishing January down 3.1%.
Meanwhile, investment strategies premised on buying shares based on their momentum just posted the best year since 2007, which isn't great news for bulls. Past instances when momentum stocks — defined as the ones showing the biggest gains in the last six to 12 months -- won have occurred closer to the end of rallies than the beginning, signaling indiscriminate buying at a time when more traditional share drivers such as earnings growth are starting to wane.
SAUDI ARABIA, IRAN
Escalating tensions between Saudi Arabia and Iran are also adding to worries Monday, according to Robert W. Baird & Co.'s Patrick Spencer. “Middle Eastern concern and the escalation compounded by further issues in China are all adding to short-term weakness,” said Mr. Spencer, equities vice chairman at Baird in London. “The outlook still looks reasonable and I would take any weakness to selectively buy, especially in the consumer and housing market recovery area.”
The Middle East, more so than the situation in China, is the “really threatening wild card” for the market, according to Neal Solomon, managing director at WealthPro.
“This is a geopolitical story that can potentially go in any direction,” Mr. Solomon said. “If there's something that keeps me up at night which we can't predict with any kind of precision, that's what it is.”
Focus will turn toward a swath of economic reports this week, including data on factory activity, the monthly jobs report and minutes from the Federal Reserve's meeting that ended with the first rate increase since 2006.
A gauge today showed manufacturing in the U.S. contracted in December at the fastest pace in more than six years as factories, hobbled by sluggish global growth, cut staff at the end of 2015. The Institute for Supply Management's index declined to 48.2, the weakest since June 2009, from 48.6 a month earlier, according to the Tempe, Arizona-based group's report. Readings lower than 50 indicate contraction. The median forecast in a Bloomberg survey of economists was 49.
With additional reporting by Greg Iacurci.
