Stocks around the world, including major US indexes, fell sharply Monday as overall earnings by US companies at the end of 2015 disappointed investors. The strong dollar, a drop in crude oil, and a slowdown in service sector growth may be factors in dampening sentiment.
By Vikram Rangala
Monday, February 8, 2016
A couple of new acronyms have come into use among analysts of the markets: the FANGs and the 3 Cs.
The so-called FANGs—Facebook, Amazon, Netflix, and Google (Alphabet)—were all down, reflecting weakness in the tech sector overall. Those same firms helped boost the S&P last year, but this year they are in the same boat as troubled stocks like LinkedIn, Twitter, Tesla, and Salesforce. In fact, Yahoo, which is now in talks to sell its internet business (perhaps to Verizon), is down less than most of the above.
The tech-heavy Nasdaq Composite Index already has fallen more than 16 percent from its all-time high reached last July, closing on Friday at its lowest level since October 2014. However, the tech sector was not the only one to see a drop in profits, or the worst. Earnings in the energy sector are down 74%.
Five of the ten sectors that make up the S&P 500 saw lower profits, with overall sales and earnings down 3-4% from a year ago, according to research firm Factset. Near 2:34 p.m. ET, the three major indexes were down more than 2%, with the Dow down 400 points, the S&P 500 off 51, and the Nasdaq down 148. Financial stocks were hardest hit, with Goldman Sachs and Citigroup down 4%.
The broader declines come after almost a year of weakness in the manufacturing sector, which was offset somewhat by expansion of the much larger services sector. Services, which include your doctor, barber, and yoga instructor, make up two-thirds of economic activity and are now seeing slower growth according to two major reports released last Wednesday.
While last Friday’s jobs report showed unemployment dropping to 4.9% and a rise in wages, investors focused on the weak job creation in January along with the weakness in multiple sectors to do some major selling worldwide across virtually all sectors.
Meanwhile, buying was heavy in three traditional safe havens: gold, US Treasury bonds, and the Japanese Yen. The continued rise in the US dollar is a factor overshadowing all three of those havens, not to mention crude oil, with West Texas Intermediate crude dipping below $30 a barrel once again.
While the strong dollar is a plus in some respects, it dampens US export revenue. For now that is offset by rising US domestic consumer spending, but the imbalance is unsustainable. It shows up most dramatically in the auto industry. Ford made 78% of its profits in North America last quarter, despite its expansions into China and India. And General Motors made 100% of its profits from North American sales.
With so many imbalances and extremes, it’s no wonder the stock market is seeing some loss of the bullishness that dominated 2015 as we enter a watch and wait period. Right now, the three things investors are watching with trepidation are those 3 Cs: China, commodities, and credit. Any one of them could either cause or solve a lot of problems for the global economy.
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