China and cheap oil are seriously spooking the markets. Again.
The latest freakout on Wall Street comes as China’s stock market crashed 7% overnight, losses so severe that trading had to be halted in the first half hour and the markets remained closed for the rest of the day. And crude oil plummeted to a new 12-year low, falling through the levels hit during the 2008 financial crisis.
The Dow dropped more than 300 points shortly after Wednesday’s opening bell. The S&P 500 fell 1.4%, while the Nasdaq declined 2%.
It’s been a brutal opening act to 2016, with the Dow logging its worst three-day start to a year since 2008.
“This has all the earmark of the beginning of a significant stock market correction. Many would argue it’s the beginning of a bear market,” Tim Anderson, managing director of MND Partners, wrote in a client note.
Most of the blame goes to China, which is believed to be the biggest threat to U.S. stocks this year.
China’s stock market is in complete disarray. For the second time in four days, trading was suspended under new circuit breaker rules unveiled this week. Many observers believe the circuit breakers, which are aimed to ease volatility, are actually creating more chaos by causing investors to sell out of fear they won’t be able to get their money out before trading is stopped.
Investors are also alarmed by the steep decline in China’s currency. The country’s central bank set the yuan’s value at the weakest level since March 2011. The currency devaluation may help boost growth, but it can hurt asset values and cause money to exit the country.
To that point, China’s central bank said it burned through a record $108 billion in foreign-exchange reserves in December in an effort to slow the sharp devaluation of its currency. It still has $3.3 trillion in cash, but that’s the lowest level since late 2012.
While investors should focus on China’s economy, not its turbulent equity market, the economy isn’t looking that great either. New reports released this week reinforce concerns that China is slowing down more than investors realized.
As if China’s crash wasn’t enough, crude oil continues to nosedive. Crude plunged 4% to $32.10 a barrel, the lowest level since late 2003.
That’s a great thing for consumers because it’s going to send gasoline prices even lower. But it worries investors because it crushes profits for energy companies. Even though oil’s plunge has been mostly driven by oversupply, cheap oil also raises concerns it’s signaling something alarming about poor demand due to slower global growth.
Against this backdrop, stocks in Europe fell more than 2%, while Hong Kong equities plunged 3%.
In a sign of the concern among investors, gold jumped another 1.3% to $1,106 an ounce. Gold is already up 4% this year as the precious metal tends to rally when fear is on the rise.
CNNMoney’s Fear & Greed Index, which is calculated based on several market indicators, is also flashing “fear.” Just a week ago it was in “neutral” territory.
