U.S. equity markets staged a partial comeback in the final 15 minutes of trading, clawing back sharp losses of more than 2% on the major averages.
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The Dow Jones Industrial Average ended down 176 points, or 1.09% to 16028. The S&P 500 shed 26 points, or 1.41% to 1853, while the Nasdaq Composite shed 79 points, or 1.82% to 4283.
All 10 S&P 500 sectors remained in negative territory as telecom, materials, and energy led the way lower.
For much of the session, the major averages traded deeply in negative territory, but managed to claw back a significant portion of those losses before the closing bell on Monday. The Dow alone gained back 224 points from its intraday low.
The trade lower was led by energy names as the sector saw an overall drop of more than 4.5% at session lows. Technology also saw steep losses as the leaders of 2015 continued to lose momentum, while financials were hit particularly hard as investors saw the Federal Reserve holding off on more rate hikes until global volatility calms. Rate hikes would bode well for positive performance in bank stocks.
U.S. equities began their steep descent in the early morning hours while European markets also gave up substantial ground as bank stocks turned red.
The Euro Stoxx 50, which tracks large-cap companies in the eurozone, dropped 3.27%, while the German Dax, French CAC 40, fell more than 3%.The UK’s FTSE 100 was down nearly 3%.
China’s mainland markets will be closed all week for the New Year holiday.
Meanwhile, global oil prices saw a sharp move to the downside as equity and oil moved through another session in tandem as hopes for a sooner-than-later cut in production continued to fade.
In recent action, West Texas Intermediate crude prices dropped 3.88% to settle at $29.69 a barrel, while Brent, the international benchmark, shed 3.46% to $32.88 a barrel.
Larry Shover, chief investment officer for Solutions Fund Group, said while Monday data out of China on foreign exchange reserves showed a drop in January, it came in better than expected. The bottom line, he said, is that global markets are stuck in reverse after a downbeat start to the year.
“Sentiment remains extremely gloomy, focused on slowing growth, less faith in central banks, and weakening credit quality,” he said.
For the year, the Dow has shed 8%, while the S&P has lost 9%, and the Nasdaq has plunged 14%.
The continued downward trend comes after data on Friday from the Labor Department showed the U.S. added far fewer jobs than expected in January, though the unemployment rate ticked down and the labor force participation rate moved slightly higher. It’s the latest piece of data that has investors in America on edge about whether the U.S. could be headed toward a recession. Data from the Institute for Supply Management last week showed the manufacturing sector was stuck in contraction for the fourth-straight month, while the services sector slowed.
As Shover reiterated, while macro data has been “far from perfect,” and fourth-quarter earnings in the U.S. have been mostly positive, it hasn’t fit into the extremely gloomy narrative that’s gripped global markets. From his standpoint, the biggest problems for Wall Street lie beyond fundamentals. He said the trade tends to focus on the what-ifs like whether the Fed – will it hike or stay lower longer, or if the U.S. economy sees a recession or blockbuster growth.
“The fundamental environment isn’t as horrible and gloomy as it’s sometimes accused of being, which helps keep earnings per share in the $115-$120 band. And it’s hard to haircut the price to earnings ratio too much given the global central bank rate environment,” he explained.
Sam Stovall, U.S. equity strategist at S&P Capital IQ, said buckle up and prepare for more volatility as Wall Street’s bull market continues to age over the next two years. He explained that in the last 50 years, the S&P has typically seen a near doubling of days with swings of 1% or more in the three months after the beginning of a rate-tightening cycle when compared to the three months before.
“The outstanding question remains: Does increased volatility imply that the S&P 500 is preparing to fall into a new bear market? Even though volatility is not a bull-market timing mechanism, it does suggest that we are well beyond the end of the beginning, and may be closing in on the beginning of the end,” he said.
As equities and oil sold off, traders rushed to safe-haven assets. Gold prices climbed 3.24% to $1,195 a troy ounce – the biggest one-day gain in 14 months while silver gained 4.28% to $15.41 an ounce. Meanwhile, the yield on the benchmark 10-year U.S. Treasury bond declined 0.110 percentage point to 1.736%, its lowest level in a year. Yields move in the opposite direction of prices.
The U.S. dollar gave up gains against a basket of global currencies. In recent action, the greenback fell 0.38%.
No key economic data releases were set for Monday, though traders looked ahead to Congressional testimony from Fed Chief Janet Yellen in her semi-annual monetary policy report. Data on the U.S. consumer, including retail sales and consumer sentiment, were due out on Friday.