China and cheap oil are seriously spooking the markets.
The latest scare came on Thursday as China’s stock market crashed 7% overnight, losses so severe that trading had to be halted for the day after the first half hour. Crude oil also plummeted to the lowest level in more than 12 years.
The Dow plunged as many as 410 points on Thursday. The S&P 500 is down 2.4%, while the Nasdaq tumbled 3%.
The losses leave the Dow down 5% so far this year. It’s on track for its worst four-day start to a year on record, according to FactSet stats that go back to 1897.
“This has all the earmarks 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.
The good news is that China held an emergency meeting on Thursday and decided to suspend the circuit breakers effective Friday. U.S. stocks bounced off their worst levels of the day after the news was announced.
Peter Boockvar, chief market analyst at The Lindsey Group, said the move could take some short-term pressure on Chinese stocks but won’t be a cure-all.
“Because of the circuit breaker, people felt they needed to sell now because they didn’t know what would happen. People now don’t have that same deadline to sell…but China’s stock market is going to go where it’s going to go,” said Boockvar.
Investors are also alarmed by the 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 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 cheap oil 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%.
The latest selloff has Wall Street once again flirting with “correction” mode, which signals a 10% decline from recent highs. The Nasdaq briefly tumbled into a correction before bouncing back. If the Dow dips below 16,516, it’ll be in correction for the first time since last summer. It got as low as 16,518 on Thursday.
In a sign of the concern among investors, gold jumped another 1.5% to $1,108 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.
