Stocks in the U.S. Got Off to Their Worst Start to a Year - Ever. the Damage Hit Every

In the markets:

Stocks in the U.S. got off to their worst start to a year - ever. The damage hit every major index, starting with the LargeCap S&P 500, which tumbled almost 6%. The Dow Jones Industrial Average dropped over 1,000 points to 16,346, down -6.19%. The SmallCap Russell 2000 was the worst-performing U.S. index, plunging -7.9% (despite the so-called “January Effect”, which historically favors Small Caps), and the tech-heavy Nasdaq composite lost over 363 points to 4,643, down -7.26%. MidCaps were also hit, with the S&P 400 declining -6.44%.

Bespoke Investment Group (BIG) reported a damage assessment of the market after the close on Friday – and it isn’t pretty. According to BIG, stocks in the S&P 500 index are, on average, down -22.6% from their 12 month peaks. Stocks in the S&P 400 are down -26.5% on average. Small cap stocks are the hardest hit, down -30.7%, on average. Eight of ten major U.S. sectors are down more than -20% from their highs. The only 2 sectors down less than -20% are the defensive Consumer Staples and Utilities. The average energy sector stock is down the worst, at 52.1%.

International markets were not spared the carnage. In North America, Canada’s Toronto Stock exchange declined -4.34% and Mexico’s Bolsa fell -6.3%. In Europe, the United Kingdom’s FTSE was down -5.28%, Germany’s DAX plunged -8.32%, France’s CAC 40 was down -6.54%, and Italy’s Milan FTSE declined -7.23%. The real carnage was in Asia, where China’s Shanghai Stock exchange cratered almost 10%, despite repeated circuit breaker halting and interventions by the People’s Bank of China, and Japan’s Nikkei was down over -7%.

In commodities, oil continued its fall, reaching a 12-year low of $32.88 for a barrel of West Texas Intermediate crude, down -11.3% for the week. Copper, considered by some a harbinger of worldwide economic activity, was down -5.62%. Precious metals were the one bright spot of the market: gold was up +$43.60, ending the week at $1,104.10 an ounce. Silver gained +0.72% to $13.93 an ounce.

In U.S. economic news, 292,000 jobs were added last month, according to the Labor Department, handily beating expectations. The average monthly gain in the 4th quarter was 284,000. For the year, the U.S. added 2.65 million jobs, down from 2014’s 3.12 million, but still the second-best since 1999. However, a concern voiced by Harm Bandholz, chief U.S. economist at UniCredit Research is that “a whopping 94%” of jobs created in 2015 were in services, up from 81% in 2014. The dominance of hiring in the service sector helps explain the resilience of U.S. jobs amid weak global growth – service sector jobs are much less dependent upon worldwide economic conditions than are manufacturing jobs.

The Institute of Supply Management (ISM) index of U.S. factory activity declined 0.4 point to 48.2 in December—deeper into contraction (sub-50) territory, and the lowest reading since June 2009. Economists had expected a rise to 49. The new orders sub-index rose slightly to 49.2, but the employment gauge declined to 48.1 from 51.3. The service sector remained in expansion but fell 0.6 point to 55.3 according to the ISM’s nonmanufacturing index. Economists had expected a reading of 56.2.

Mortgage applications declined -12% last week after falling -17% the prior week to the lowest level since December of 2014. Applications for loans to buy a home fell -11% following the prior week’s -4.3% decline. Refinancing activity declined -12% after plunging -26% in the prior week.

The Commerce Department reported that U.S. construction spending fell -0.4% in November, the first decline since June of 2014. Economists had been looking for a +0.9% increase. November’s construction spending was still up +10.5% from the same time last year, however. U.S. home prices rose +0.5% in November, making an annual gain of +6.3% according to real estate research firm CoreLogic. Colorado and Washington (state) were the big gainers, up +10.4% and +10.2% respectively. Texas and California were also strong, each up about 7%. CoreLogic is expecting growth to moderate based on the fact that home-price gains are currently outpacing income growth by a wide margin.

In Europe, inflation rose +0.2% in December versus last year—the same as November’s final reading. December’s reading missed analyst estimates of +0.3%. Food, alcohol, and tobacco prices were up +1.2%, down from the previous month’s +1.5% gain. Energy prices in Europe were down -5.9%. The European Central Bank’ (ECB) goal of >2% inflation has not yet been met, likely to spur the ECB to take more action to boost the Eurozone’s sluggish economy. In Germany, factory orders had a strong gain as new orders placed with German manufacturers rose +1.5% in November, handily exceeding expectations of a mere +0.1% rise. It was the 2nd month of increases following October’s +1.7% gain.

In China, the Caixin/Markit China Purchasing Managers’ Index (PMI) contracted further to 48.2 in December from 48.6 in November. It was the 10th straight month of contraction. China’s services sector expanded at the slowest pace in a year and a half last month. China’s People’s Bank of China (PBC) has been more active than usual recently in managing the value of the yuan. Eight straight days of setting the value of the yuan lower vs the dollar helped spark the recent major selloff in Chinese stocks. On Friday, the PBC finally set the peg a bit higher, having reached a 5-year low on Thursday, and Chinese stocks rose. The aggressive devaluation has led to worries that China’s growth outlook is even worse than commonly thought.

Finally, on Friday the Labor Department reported that December’s unemployment rate was unchanged at 5%. But that’s not the only measure of unemployment that economists typically look at. One of those other measures is known as the “U-6” rate – defined by the government as “Total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force.” Many consider it to be a broader, superior measure. One reason frequently cited is that it includes among the unemployed those that are working part-time but who want to work full-time – the “involuntary” part-time workers. The U-6 rate stayed level in December at 9.9%, but is still well above the sub-8% rate achieved in 2006. Here, from CNBC, is a 10-year lookback at the U-6 unemployment rate:

(sources: Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com, FactSet; Figs 1-5 source W E Sherman & Co, LLC)