NEW YORK (BLOOMBERG) - Volatility erupted anew in financial markets as a fresh year brought jarring swings, anxiety about global growth and the worst start on record for equities both in the US and in the world.
Investors pulled US$8.8 billion from global equity funds, according to data collected by EPFR Global Inc. The Standard & Poor's 500 Index tumbled 6 per cent in the week, the biggest drop since September 2011 and the steepest slide over five days to begin a year on record. Even a blockbuster US jobs report that bolstered optimism in the world's largest economy wasn't enough to arrest the freefall, with an end-of-week rally stalling as investors shunned US equities heading into the weekend.
It was the same story everywhere. China's Shanghai Composite Index slid 10 per cent for the week, while Europe's Stoxx 600 Index lost 6.7 per cent for its biggest drop in four years. A gauge of emerging-market equities compiled by MSCI fell 6.8 per cent, while its all-world index dropped 6.2 per cent in its worst week since 2011.
While the primary culprit was China, where a surprise weakening of the nation's currency fueled concern that a slowdown there is worse than thought, a host of factors contributed to the rout. Crude prices plunged to a 12-year low, reviving fears that indebted energy producers won't be able to remain solvent. North Korea tested a nuclear weapon, heightening geopolitical worries, and Middle East tensions mounted.
The new year started with a Federal Reserve intent on raising borrowing costs at the same time corporate earnings are forecast to fall through the first quarter. With volatility returning and a measure of share valuations stretched, investors are finding little reason to pile into a bull market that is approaching its seventh anniversary.
"It's going to be a jittery market," said Brad McMillan, chief investment officer of Commonwealth Financial Network which oversees US$100 billion. "To now see August's problems come back with a vengeance is frightening. The US will come through it just fine. But make no mistake, China is potentially a big problem and people are going to be more responsive going forward."
The S&P 500 endured four slides of more than 1 per cent, including a 2.4 per cent rout on Thursday, to close at 1,922.03, the lowest level since Sept. 30. The Dow Jones Industrial Average tumbled 1,078.58 points in the week, or 6.2 per cent, to 16,346.45. Almost 95 per cent of S&P 500 shares retreated, while Wal-Mart Stores was the only member of the 30-stock Dow to gain.
The tumble in global equities began on Monday in China after a weakening yuan sent stocks there down 7 per cent to trip new circuit breakers that shut markets midday. A claim by North Korean officials that the country successfully tested its first hydrogen bomb added to investor angst. Crude's plunge below US$33 a barrel in New York pushed energy producers in the S&P 500 to the lowest levels in five years.
"It was a hectic week," said Mark Spellman, a fund manager who helps oversee more than US$4 billion at Alpine Funds in Purchase, New York. "We're still in a risk-off mentality. Any kind of risk-on trade mentality that comes in is going to be short-lived until global economic growth improves."
US markets shook, with the Chicago Board Options Exchange Volatility Index surging 48 per cent to 27.01. The VIX's biggest jump in a month left it 61 per cent above the one-year average of 16.7. At the same time, share-price multiples for stocks in the S&P 500, at 23 times reported earnings, are 30 per cent above the average since 1936.
"Overall, there's instability the market is trying to get its arms around," said Dan Deming, a Chicago-based manager at KKM Financial LLC. "The psychology in the market was ripe for a selloff, the fundamentals were starting to show some cracks, particularly in China, and the technical aspects looked pretty bearish."
China took steps Friday to stabilize its markets, and a government jobs report in the US that indicated resilience in the labor market provided a burst of optimism that the world's largest economy would be spared from slowing global growth. That faded in afternoon trading, with the selloff intensifying as investors headed for the weekend.
The S&P 500's rout left it almost 10 per cent below its record set in May, though the gauge remains 2.9 per cent above its August trough. All 10 of the index's major groups retreated. Companies with exposure to China led losses, with resource producers and miners falling at least 6 per cent.
The start of earnings on Jan 11 is expected to bring another decline, with analysts forecasting profits in S&P 500 members fell 6.7 per cent in the fourth quarter, according to data compiled by Bloomberg. That would mark the third straight quarter of year-over-year retreats.
"It has been a rough week. When investors saw there was no traction and the market was unable to hold rallies over several attempts throughout the day it just became fear of going into the weekend," said Gene Peroni, a fund manager at Advisors Asset Management Inc. "The market has just been so reactive to news, people will wait on the sidelines and see what the weekend brings."