For the week ending January 8, 2016, the markets experience the worst first week of a new year in history. For this past week, the major stock indexes ended the first week in the red; the Dow was down -6.2 percent, the S&P 500 was down -6.0 percent, and the Nasdaq was down -7.3 percent. In other news: China’s markets crash reflecting a weakening economy; outstanding jobs report ensures further rate hikes; and, crude oil prices continue to fall. Below is a recap of the markets for each day of the week.
The markets declined sharply on Monday in reaction to the plunge in China’s markets. Oil dropped $0.20 to $36.88. The Dow dropped -1.6 percent to 17,148; the S&P 500 dropped -1.53 percent to 2,013.
On Tuesday, the markets bounced fractionally despite poor vehicle sales which fell -5 percent. Oil fell $0.74 to $36.14. The Dow rose fractionally to 17,158; the S&P 500 rose 0.20 percent to 2,017.
The markets dropped on Wednesday on contracting trade data and despite the FOMC minutes. Oil dropped $2.08 to $34.06. The Dow dropped -1.50 percent to 16,906; the S&P 500 dropped -1.31 percent to 1,990.
The markets on Thursday sank as China’s Shanghai Composite collapsed -7 percent. Oil dropped $0.80 to $33.26. The Dow dropped -2.3 percent to 16,514; the S&P 500 dropped -2.37 percent to 1,943.
On Friday, the markets fell despite a very strong jobs report. Oil dropped $0.38 to $32.88. The Dow dropped -1.0 percent to 16,346; the S&P 500 dropped -1.08 percent to 1,922.
The markets experienced a horrible week in response to China, North Korea, and the Saudi Arabia and Iran tension. The S&P 500 declined -6 percent for the week (the worst one-week performance since August 5, 2011) and the worst opening week in the history of the stock market. Over $1 trillion were lost in U.S. stocks in the S&P 500 index.
China’s market meltdown reflects a declining economy. China has enjoyed rapid growth the last three decades thanks to its vast cheap workforce exporting cheap products. But now it’s faced with rising labor costs, an aging population, and escalating pollution. The government is trying to shift away from reliance on exporting cheap consumer goods worldwide to a new growth model based on innovation, domestic consumption, and high-end manufactured products and services. China’s problems set off a rout in global markets (including the U.S.). The Shanghai Composite triggered circuit breakers on Monday and Thursday as the index dropped -7 percent. George Soros, an American financier, warned that the problems with China’s economy and the subsequent devaluation of its yuan were undermining the financial stability of world markets that resemble the global crisis in 2008.
An excellent jobs report on Friday supports the Fed’s decision to raise interest rates. The jobs report showed that non-farm jobs increased at a much higher rate than expected at 292,000 (vs. 215,000 expected) while the unemployment rate held at 5 percent. Upward revisions were made to the October and November job numbers. As the economy gets closer to full employment, wages should start to increase as well. This will bolster the Fed’s current plan to raise rates in 2016 to a 1.4 percent level in several hikes over the year. The only concern (and possible cause for delay of additional rate hikes) is the lack of inflation, which the Fed would like to see rise to 2 percent (or more).
Crude oil prices finish below $34 per barrel, a level not seen since 2004. Concern about the slowing economic growth in China, an increasing supply of oil from the U.S. and Mideast, and a drop-off in global demand have all contributed to the drop in crude oil prices of 70 percent over the last 18 months. Analysts expect the price of crude (WTI) to fall below $30 in the near future, and possibly below $20.
The bottom line: the strength in the labor market (from the jobs report) is consistent with the expectation that the Fed will raise rates in 2016, and that GDP will be stronger for the fourth-quarter. While global weakness has not hit the U.S. markets in full force, global volatility has with the VIX now at 27.01.
The focus next week in the U.S. will be the Chinese markets which are expected to increase volatility. Jobless claims are expected to show strength, as import and export prices show weakness. Globally, the focus next week will be the Bank of England, industrial production, and the continuing volatile situation in the Middle East and crude oil prices. In addition, the focus will be on the following: UK (BOE monetary policy, Industrial Production); Eurozone (Industrial Production); Germany (nothing); China (nothing); and Japan (Producer Price Index, Machine Orders).
Year-to-date the markets are down: Dow -6.2%; S&P500 -6.0%; Nasdaq -7.3%.
The Markets for the past week were: DJIA down -6.2%; S&P500 down -6.0%; Nasdaq COMP down -7.3%.
Commodities (ETFs) for the past week were: Gold (GLD) up 4.16%; Silver (SLV) up 0.83%; Oil (OIH) down -9.98%; Dollar (UUP) down -0.35%; 30-year Bonds (TYX) dropped 9 basis points to 2.92%.
The VIX this past week (a measure of market sentiment and volatility) rose to 27.01%. This reflects the collapse of the Chinese markets, the nuclear test of a hydrogen bomb by North Korea, and the tensions between Saudi Arabia and Iran.
To see what’s on the calendar for next week, go to the Econoday calendar.
The economic calendar for next week is light:
o Monday – nothing
o Tuesday – JOLTS
o Wednesday – EIA Petroleum Status Report, Beige Book, Treasury Budget
o Thursday – Jobless Claims, Import and Export Prices
o Friday – PPI-FD, Retail Sales, Empire State Mfg Survey, Industrial Production, Consumer Sentiment, Business Inventories
If you’re trading options, it is suggested trading Put or Call credit spreads for next week at 3.0 standard deviations or greater (or stand aside and do not trade). Expect the price of the SPX to fall within 1804 and 2046 (2 standard deviations).
For more information about options, see the ‘Suggested Links’ below.