It was a disheartening week for the bulls and news of it being the worst start ever for stocks to begin a new year, had strategists scratching their heads. We did, after all, get a solid-looking jobs number, and the Chinese stock market gained about 2%, but that was not enough to keep investors from selling in a big way. Bulls were hoping for an upbeat and positive close on Friday, but that was not to be the case. The stock market sank into the close and finished the week sharply lower, with the major indices posting weekly losses of 6.2% for the Dow, 7.3% for the Nasdaq and 6% for the S&P 500.
The government jobs report showed that 292,000 jobs were created in December, which topped estimates of 215,000, and it was also up from November’s 252,000 new jobs. The problem with this sort of positive number was that it reassured the Federal Reserve that the economy was likely strong enough to handle further rate hikes in this year. San Francisco’s Federal Reserve President John Williams was out there making the case for multiple rate hikes in this year, and that was not exactly music to the ears of investors. Bulls were disappointed at seeing stocks fade into the close and end the week on a negative note.
It is easy to blame China for the woes of the U.S. stock market, and its 7% drop on Thursday was cause for alarm. What made China’s stock market plunge difficult, was how the Chinese stopped trading action. The last thing a country needs is to close its markets when fear is in the air, and that was exactly what the Chinese government did. Granted that Chinese stocks rallied by about 2% on Friday, but we can only imagine what might happen when the Chinese stock market opens again on Monday. The market action in China is a “global shock” and a big “wild card” that will affect investor sentiment in the days ahead.
The recent news of a slowdown in Chinese manufacturing appears to have set the Chinese selloff in motion, and it will be telling in the days and weeks ahead if this negative news continues. Oil prices have been reflecting fears of a global GDP slowdown for months, and seeing oil dip below $33 per barrel only raises the fears that the global economy might not be as vibrant and strong as we had thought. China is a driving force in the global economy, and a slowdown in China’s economic “miracle” of the past couple of decades could have far-reaching effects.
What makes the worry of a Chinese slowdown more complicated is that our own U.S Federal Reserve seems intent on raising interest rates. The Fed does not change gears quickly, and it seems committed to “normalizing” interest rates in the coming year. The Fed held off on rate hikes beginning in August, September and October, and it waited patiently until December to do so. Alan Greenspan warned last year that global markets would likely throw a “taper tantrum” once rate hikes began, and that seems to be what we are witnessing in global financial markets right now. Granted that the S&P 500 is only about 10% off its all-time high, it is still sort of a “tantrum” just the same.
So, what is the Federal Reserve to do? The December jobs numbers were strong, and that report has given the Fed a “green light” for raising interest rates this year. The problem for the Fed is that it did not likely anticipate a massive stock market selloff to begin the New Year, nor did it expect a big decline in the Chinese stock market. If the Fed acts in a “knee-jerk response” and backs off from its rate hike stance, then it risks losing an awful lot of credibility and trust. Why the Fed Heads came out this week saying that the Fed would put in motion three, four or even five rate hikes this year is a mystery for the ages. The stock market has never reacted well to rate hikes, period.
Likewise, the stock market has never acted all that well to a crashing Chinese stock market nor to oil prices at multi-year lows below $33 per barrel! The Fed is in an even tougher position because it has now diverged from Japan and the ECB, which is lowering rates and launching more Quantitative Easing (QE) programs in response to their respective economies that continue to slow. The U.S. stock market wasted no time in showing its concern about the state of the global economy this week, and the ball is suddenly back in the Federal Reserve’s court.
It has been a rough start to the New Year, and bulls are hoping that calmer heads prevail. The mantra of “How January goes, so goes the year” is on investors’ minds in a big way right now, and we will have to wait and see how the next week unfolds. Many market-leading stocks of the past six or seven years have recently been hit hard. So again, we will have to see how this current market challenge plays out in the days ahead. The domestic U.S. economy is still looking strong, but what we are experiencing might be more of a market event than an economic event.
The Gorilla wishes each and all a relaxing weekend, and it will likely be good to take a step back from this week’s volatile markets. We will be back in action on Monday. The stock market has a way of surprising the majority of investors most of the time, so maybe a bounce is in the cards. Stay tuned!
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