Potholes pop up on Wall Street

Traders at the New York Stock Exchange. The turbulence on Wall Street last month was the storm that finally came after years of calm for investors.
Traders at the New York Stock Exchange. The turbulence on Wall Street last month was the storm that finally came after years of calm for investors.PHOTO: REUTERS

Smooth ride jolted with major indices down; S&P collapse its worst in 3 years

NEW YORK • For several years, parking one's savings in the United States stock market seemed like a no-brainer. Not only did stocks climb steadily - giving investors far better returns than they could get from their bank accounts - the ride up was smooth, too.

Then last month, the calm broke.

Stocks, as measured by the Standard & Poor's 500-stock index, tumbled 6.3 per cent last month, while those by the Dow fell 6.6 per cent and the Nasdaq 6.9 per cent.

The S&P decline was the worst monthly performance by the benchmark in more than three years and wiped more than US$1 trillion (S$1.41 trillion) off the value of stocks. The Dow registered its worst monthly percentage decline since 2010, while the Nasdaq posted its worst month since 2012.

Crucially, the turbulence interrupted an unusually long period of tranquillity for investors.

"We were in a bull market in complacency," said Mr Douglas Kass of Seabreeze Partners Management, a hedge-fund firm. "I think that the spike in volatility that we've seen in the last 10 days is the precursor to further spikes."

In recent trading days, investors sold heavily as they grappled with new and old concerns.

The main source of worry continues to be China's US$10 trillion economy, which appears to be slowing more than analysts had originally thought. The slowdown has raised fears that the country will now buy fewer goods and services from other countries, weighing on a global economy that has consistently struggled to gain traction since the financial crisis of 2008.

China's leaders surprised financial markets with a devaluation of the yuan on Aug 11. And their efforts to shore up the stock market with interventions seemed to erode, rather than build, confidence.

Investors are also frettingover the direction of interest rates, which the Federal Reserve has not raised since 2006, a policy stance that has helped stimulate the economy and drive financial markets higher. As August ended, analysts found reasons to believe that the markets may have found a bottom.

One potentially bullish indicator is the price of oil. The benchmark New York crude contract has soared 26 per cent from its low last week, to US$48.32 a barrel on Monday. Oil had slumped this year, suggesting that demand for the commodity was falling as economies around the world slowed.

The latest bounce indicates that investors are betting on demand for oil not weakening further.

But China's weak factory data heightened worries of a slowdown and caused Wall Street to open lower yesterday. Five minutes into trading, the Dow Jones Industrial Average was down 1.94 per cent, while the S&P 500 lost 1.92 per cent and the Nasdaq Composite gave up 1.96 per cent.

A big debate on Wall Street now is whether corporate earnings are strong enough to make stocks resilient if faced with further shocks from overseas and uncertainty about monetary policy.

Some analysts still see enough strength to sustain the bull market for US stocks that started back in 2009. "The crucial factor for us is the economic data - and the US economy is doing well," said Mr Mark Haefele, chief investment officer at UBS' wealth management arm.

US corporations have been consistently squeezing out higher profits each year by increasing revenue, cutting costs and buying back stock, which increases earnings on a per-share basis.

But some analysts remain cautious. "The fundamentals around the world are still wobbly," Mr Kass, the hedge fund manager, said. "And valuations are still elevated."


A version of this article appeared in the print edition of The Straits Times on September 02, 2015, with the headline 'Potholes pop up on Wall Street'. Print Edition | Subscribe