Blame it on China or revived tensions between Saudi Arabia and Iran, or both. Events in those countries triggered a massive selloff in global stock markets Monday, leading at one point to a 450-point drop in the Dow Jones Industrial Average.
By midday, the Dow was down 350 points and the S&P 500 was off 40 points — both down about 2% from the previous close on Dec. 31 — then sank again before recovering to end the session off a little more than 1.5%.
The rout began in China when the government there reported a larger than expected drop in manufacturing activity in data (known as the PMI report), marking the 10th consecutive decline in that index. Chinese stocks plummeted, triggering circuit breakers that were used for the very first time. Trading was initially stalled for 15 minutes, then halted altogether after the Shanghai Shenzhen CSI 300 Index dropped 7%.
European stocks followed, with the Pan-European STOXX 600, London FTSE and Paris CAC 40 ending their sessions down about 2.5% each, while Germany’s DAX sank 4.3%.
Adding to the downturn were growing tensions between Saudi Arabia and Iran, and their allies.
After Saudi Arabia executed a prominent Shiite cleric as part of a mass execution, crowds of Shiite Muslims protested in cities throughout the Mideast condemning the killing. Then Saudi Arabia cut off diplomatic relations with Iran, and Bahrain and Sudan followed suit while the UAE downgraded its diplomatic relations with Iran. Oil prices spiked higher, then retreated on the news.
“The markets have overreacted,” says Hugh Johnson, chairman and chief investment officer of Hugh Johnson Advisors. “China is a problem, but is that big a problem? No.”
Indeed, David Dollar, a senior fellow at Brookings’ John L. Thornton China Center, says, “The actual economic news from China is not bad” and “there is no evidence of a hard landing so far.”
He says that even though China’s manufacturing PMI “continues to disappoint,” the country’s “service sector PMI rose in December and is at a healthy level,” and today’s selloff was also due to “the looming end to a ban on large investors selling their shares.”
Jeffrey Saut, chief investment strategist at Raymond James & Associates, says the situation between Saudi Arabia and Iran is a bigger problem for the market than China’s stock slide because the Chinese government will do everything it can to prevent a complete market collapse, while long-standing tensions between Saudi Arabia and Iran will be more difficult to resolve.
Like Dollar, Saut sees signs of strength in the Chinese economy. China is “no longer building bridges to nowhere,” says Saut, but boosting domestic production. “IPhone sales are up 80%, year over year and Nike sales are more than 30%.”
Doesn’t Hurt to ‘Have a Little Cash’
Samantha Azzarello, global market strategist at JPMorgan Chase, is not too concerned about today’s market rout. “It’s really the same old issues we had last year; China is really on the radar.” But she notes that buying the broad market index is not enough. “You have to be more nuanced” and expect “lower returns with more volatility.”
She likes the technology and consumer discretionary sectors and says “energy is an interesting contrarian play.”
Saut says he’s sitting on 20% cash — which is down from 40% cash in December 2014 — and doesn’t expect to raise any more cash unless stocks fall below August 2015 lows.
Johnson says it doesn’t “hurt to have a little cash on hand to invest” on market dips, but investors will need to “pick their entry points,” which can be different for different stocks. He expects low single digit returns on the S&P 500 this year and is watching 1,950 as a key support level for the index.
Nigel Green, the founder and CEO of deVere Group, says, “Volatility is likely to rip through financial markets in the first half of 2016. There’s a cocktail of uncertainty, with the main ingredients including China’s economic woes, higher interest rates in the U.S., historically low oil prices, Britain’s referendum on exiting the EU, and increasing tensions in the Middle East.” But, he says, “Volatility can represent enormous opportunity,” providing entry points for investors to put money to work at lower prices.
— Read “Economic Recovery Is Partly ‘Illusion,’ Says Brookings Economist” on ThinkAdvisor.