Global stocks tumbled into the new year amid worries about China’s slowing economy, rapidly falling oil prices and disappointing U.S. corporate earnings growth. Financial stocks experienced the sharpest declines, weighed down by concerns about risky loans in the energy sector and persistently low interest rates. Defensive stocks generally held up better. High-grade bonds rallied on safe-haven buying. The U.S. dollar rose against the euro, the yen and most other currencies.
Index Returns (Monthly)
U.S. shares retreated in as pessimism about China’s economic growth and sinking commodities prices swept through stock markets globally. Some disappointing earnings reports also hurt investor sentiment. The Standard & Poor’s 500 Composite Index fell 5%, its worst January return since 2009. Stocks stumbled through January 20 but advanced thereafter, helped by Japan’s surprise decision to cut interest rates on the last trading day of the month. The Dow Jones Industrial Average declined 5% and the Nasdaq composite declined 8%.
Most S&P sectors ended in negative territory. However, telecommunication services, utilities and consumer staples advanced as investors sought safe havens in defensive sectors. S&P 500 companies were on track to record a third consecutive quarter of shrinking earnings growth amid a growing number of downward revisions to earnings forecasts, according to data provider FactSet.
Weaker-than-expected GDP growth in China pressured commodity prices and weighed on the materials and energy sectors, which lost 11% and 3%, respectively. U.S. crude fell a further 9%, briefly dropping below $30 a barrel amid reports global oil producers were continuing to pump at breakneck speed and storage facilities were at capacity. Chevron posted its first quarterly loss in 13 years, losing 31 cents per share despite having undertaken major cost-cutting in December; its share price declined 4%. Noble Energy’s shares fell 2% as it joined a growing list of energy companies announcing dividend and budget cuts.
The oil patch’s troubles seeped into other areas, including financials, which shed 9% as banks braced themselves for an increase in losses on loans to oil and gas companies. A muted trading environment has also hurt banking shares. Nonetheless, several banks reported better-than-expected fourth-quarter earnings. JPMorgan Chase reported its largest annual profit ever, driven by its credit card and commercial banking divisions; Wells Fargo, Bank of America and Citigroup also beat consensus earnings expectations. Still, all saw their share prices sink. Goldman Sachs said its fourth-quarter earnings dropped significantly from a year previous, hurt by its $5.1 billion settlement with the Justice Department and other entities to resolve claims around its handling of mortgage-backed securities prior to the financial crisis.
Health care stocks retreated overall, with many pharmaceutical and biotechnology companies hurt by concerns over drug pricing. Among the few stocks advancing, Baxter International spinoff Baxalta rose 3% as it agreed to be acquired by Ireland-based Shire for around $32 billion in cash and stock. The merger will create the world’s largest producer of treatments for rare diseases. Consumer discretionary stocks fell 5%. Shares of Netflix and Amazon, which more than doubled in 2015, plunged 20% and 13%, respectively. While Netflix beat consensus earnings estimates on the strength of its global subscriber growth, Amazon fell short due to higher-than-anticipated fulfillment costs during the holiday season.
Information technology retreated 5%. Apple lost 8% despite beating forecasts and reporting its best quarterly profit ever at $18 billion, reflecting disappointment over slowing sales growth for iPhones and a dearth of new product news. Microsoft reported a 10% decline in revenues year over year, but its shares fell just 1% due to optimism over its cloud computing prospects. Facebook shares rose 7% as it beat earnings and revenue forecasts and topped 1 billion daily active users.
Economic data offered a mixed picture of the U.S. economy. Employers added 292,000 jobs in December, surpassing expectations and bringing the 2015 total to 2.65 million. However, wage growth remained sluggish. The Commerce Department reported the advance estimate of gross domestic product growth for the fourth quarter at 0.7% and revised down its earlier estimate of third-quarter GDP growth to 2%. The Institute for Supply Management’s Purchasing Managers Index moved slightly higher to 48.2% in January, but signaled the fourth consecutive month of contraction. The Federal Reserve opted to keep interest rates steady at its January meeting but said it was monitoring events in global markets and their impact on the U.S. economy.
In bond markets, the Barclays U.S. Aggregate Index gained 1.4%. The yield on the benchmark 10-year Treasury note fell 33 basis points to 1.94%. Investment-grade corporate spreads to Treasuries widened by 28 basis points to 193 basis points amid weaker economic activity and heavy new issuance. Energy and basic materials were among the weakest sectors. Treasury Inflation Protected Securities gained 1.5%, while corporate bonds rose 0.4% and municipal bonds notched a 1.2% return. High-yield corporate bonds continued to struggle, losing 1.6%. In the new-issue market, Anheuser-Busch InBev sold $46 billion of bonds to help finance its acquisition of SABMiller. The deal included one floating-rate and six fixed-rate tranches, the largest of which were two $11 billion fixed-rate notes with 10- and 30-year maturities paying 3.65% and 4.9% coupons, respectively.
European stocks declined sharply amid the global market sell-off and troubles in the eurozone banking sector. Reacting to the market turmoil and weak eurozone economic growth, European Central Bank President Mario Draghi said the ECB would “reconsider” its recent monetary policy decisions, fueling investor expectations that the bank would increase its massive bond-buying stimulus program in the months ahead. The MSCI Europe Index fell 5%.
Most sectors lost ground, led by an 11% decline in financial stocks. European banks were particularly hard hit by a combination of factors, including concerns about a slower-than-expected economic recovery in the eurozone, exposure to bad loans in emerging markets, and uncertainty about the direction of U.S. interest rates. Shares of HSBC fell more than 8% amid worries about the British bank’s heavy exposure to China and other struggling Asian markets. HSBC derives roughly 70% of its earnings from Asia.
Other European banks declined on more local challenges. Shares of Banco Santander fell after the Spanish bank reported a steep drop in fourth-quarter net profit, partly due to the wrongful sale of payment-protection insurance policies in the U.K. Santander officials said the bank set aside €600 million to address potential claims by affected policyholders. Santander shares also continued to come under pressure due to the bank’s exposure to Brazil’s recessionary economy. Shares of European banking giants UBS, BNP Paribas and Barclays also experienced double-digit declines.
Stocks in the materials sector lost 9% as slowing global economic growth hurt demand for raw materials. Shares of German conglomerate BASF fell as lower oil prices put pressure on its chemical and energy-related businesses. Shares of mining giant Rio Tinto declined as China’s economic woes hit the iron ore market. Prices for iron ore, used to make steel, have fallen about 75% over the past five years. The stock also came under pressure amid speculation that Rio Tinto and rival BHP Billiton might cut their dividend payouts.
Consumer discretionary stocks fell 7%, driven lower by concerns about tepid economic growth and disappointing sales. Shares of Daimler tumbled more than 17%; the German automaker’s CEO warned that European car sales growth is not likely to be as strong this year as it was in 2015. New car sales rose 9.3% in Europe last year, the biggest gain since 2009. BMW and Volkswagen shares also fell sharply.
Health care stocks retreated roughly in line with the market, falling 5% in aggregate. The shares of several large pharmaceutical companies fell amid renewed criticism of high drug prices and investor concerns about rising competition for valuable drug franchises. Shares of Novartis declined as the Swiss drug giant reported a 57% drop in fourth-quarter net profit. Novartis executives blamed some of the decline on a strong dollar, which hurt its U.S. earnings, and trouble in its eye care division. Shares of Roche, Bayer and Novo Nordisk also experienced significant declines.
In bond markets, European sovereign debt rallied on investor expectations for ramped-up stimulus efforts by the ECB. The central bank may increase its bond-buying program — which now stands at €60 billion a month — at its next policy meeting in March. Doubts about the Federal Reserve’s ability to raise U.S. interest rates amid the recent global market turmoil also weighed on European bond yields. The yield on Germany’s benchmark 10-year note fell 30 basis points to end the month at 0.33%.
Japanese equities fell as concerns over global growth and plummeting commodity prices sent the Nikkei 225 to a 15-month low. Markets rebounded on the final day of trading, however, as investors cheered the Bank of Japan’s surprise announcement to set negative interest rates for the first time. Despite the additional stimulus, the MSCI Japan and MSCI Pacific indices both finished the month 8% lower. The yen weakened 1% versus the U.S. dollar, reversing course after briefly touching its strongest level in a year.
The Bank of Japan set negative interest rates for the first time amid a series of poor economic data releases that highlighted the country’s sluggish economy. Despite strong corporate profits, wage growth slowed in November, a challenge to Prime Minister Shinzo Abe’s plan to lift the country out of deflation. In December, consumer prices excluding food and energy increased 0.9% while headline inflation ticked up just 0.2%. Household spending was 4.4% lower in December, its fourth consecutive monthly decrease and the largest drop in almost a year. Factory output also fell in December, declining at its fastest pace since May and lower than forecast. Following the two-day meeting, BOJ officials warned that that interest rates would be cut “further into negative territory if judged as necessary.”
All sectors in Japan declined. Shares of the three largest banks retreated further after the BOJ announcement amid concerns about deteriorating earnings. Negative interest rates will force banks to pay a fee on some deposits. Fanuc shares sank 25% after the robotics maker unexpectedly cut its earnings forecast due to slowing growth in China. However, several property stocks gained on hopes that lower borrowing costs will spur more activity in the real estate market. The consumer staples sector also held up relatively well, only declining 1%. Japan Tobacco shares jumped after the firm applied for approval to raise cigarettes prices.
Australian equities shed 9% as the economy continued to struggle with lower commodity prices and slowing growth in China, its top trade partner. Shares of energy, materials and large banking companies all weighed heavily on index returns.
The MSCI Hong Kong Index also sank 9%, dragged down by the financials sector. Property stocks fell sharply on concerns over rising interest rates and a peaking real estate market. A survey by public policy firm Demographia declared Hong Kong the most unaffordable market in history, with the median price of a home 19 times higher than the median household income. The interbank lending rate reached its highest closing level in more than six years, increasing the cost of new mortgages.
Emerging markets slumped. The MSCI Emerging Markets Investable Market Index fell 7%, hurt by anxiety about China’s monetary policy, unstable oil prices and growth prospects for developing countries. All sectors declined, led by financials and consumer discretionary. Meanwhile, many currencies fell to fresh lows amid global growth concerns. U.S. dollar–denominated bonds, as measured by the J.P. Morgan EMBI Global Index, edged slightly lower; local currency debt, as measured by the J.P. Morgan GBI-EM Global Diversified Index, rose 1.6% in local currency terms.
The MSCI China IMI sank 13%, hurt by worries over the government’s moves to intervene with its currency and the health of China’s economy. The renminbi fell 1% against the dollar as Chinese monetary authorities moved to manage the renminbi against a basket of currencies. They also ramped up efforts to halt the outflow of money from the country, including placing limitations on foreign companies seeking to repatriate earnings and shrinking the amount of currency available for banks in Hong Kong to make loans. Reports confirmed China’s manufacturing sector weakened in 2015, with industrial profits declining 2.3%. The International Monetary Fund and World Bank both trimmed their 2016 economic growth forecasts for China to 6.3% and 6.7%, respectively.
Other Asian markets were mixed. Stocks in Taiwan dropped 5% as newly elected President Tsai Ing-wen inherited a struggling economy that is closely connected to China. South Korean equities fell 5%. Tech giant Samsung Electronics lost ground amid weak demand for its computer chips and smartphones. The MSCI India IMI lost 8% as Prime Minister Narendra Modi bid to push major legislation through parliament, including a national sales tax. Indonesian stocks fared better, rising 1%. In mid-January, the country’s central bank cut its key interest rate by 25 basis points to stoke growth. Investors also appeared to gain confidence in ongoing reforms to improve the country’s business climate.
Stocks in Brazil and Mexico lost ground, hampered by weak commodity prices and the slowdown in the global economy. The MSCI Brazil IMI slumped 8%. The country’s central bank left interest rates unchanged as Brazil’s new finance minister grapples with rising consumer prices and a deep recession. The real continued to struggle, slipping 2% against the dollar. Mexican stocks fell 4% and the peso touched a record low against the dollar, declining 5%. Mexico’s central bank signaled it plans to keep raising short-term interest rates in parallel with the U.S. Federal Reserve to help prop up the currency. The Mexican government also said it would slow the pace of oil-asset sales due to the prolonged slump in energy prices. Elsewhere in Latin America, Colombia warned its growth is at risk due to the rout in oil prices. The MSCI Colombia IMI shed 3%.
South African stocks fell on economic and political woes. The MSCI South Africa IMI declined 4%. The country’s central bank raised its benchmark interest rate by 50 basis points in a bid to protect its beleaguered currency. The rand fell 3% against the dollar to a fresh low. The central bank also lowered its full-year economic growth forecast to 0.9% from 1.5%.
Russian equities sagged as worries grew about the economic health of the country amid weak prices for oil and tepid consumer spending. The MSCI Russia IMI fell 1%. Russia’s economy contracted 3.7% in 2015 and is expected to remain mired in recession this year.
In debt markets, Mexico sold $2.25 billion in 10-year bonds, its biggest such sale in two years. Chile sold €1.2 billion (US$1.3 billion) of 10-year euro bonds, while Poland raised €1.75 billion (US$1.9 billion) in a euro bond sale. In the corporate market, Pemex, the state-run Mexican oil giant, raised $5 billion via notes maturing over the next three to 10 years.