One could say the Dow is starting the trading year off with a bang, except that noise is actually the sound of the market making a controlled flight into the side of a mountain. In the first few minutes of the first trading day of the new year the Dow was down by nearly 450 points. Later in the morning indexes recovered, only to plunge again to their previous lows.
In truth no one was expecting 2016 to be a banner year in the stock market. Profits were already under pressure at a time when interest rates were on the rise. Then came a parade of bad news that’s been building for some time. To really get at the truth behind today’s market meltdown we need to round up the usual suspects.
Weak economic news out of China triggered a selloff in their stock market that was so steep it tripped fail safe mechanisms to halt trading. Markets in China fell nearly seven percent before the trading halt, a blistering start to the new year. The news that triggered all the selling was a report showing China’s manufacturing sector actually contracted in 2015. Subsequent fears of a global recession triggered a bloodbath on equity markets around the globe. China’s stock market shutting down is a huge development that’s going to send even more shockwaves through the global economy in the days ahead.
Corporate profits in aggregate are down seven point three percent from their peak in 2014. Such a drop in corporate profits has preceded nearly every recession we have on the books. The profit decline continued through 2015 and will hurt domestic investment in 2016. As the global contagion sparked by China continues to spread, corporate profits will continue to suffer. While that may make interesting news here in the U.S., it’s a much bigger deal in many smaller economies, already being pummeled by the next suspect in our lineup of economic troublemakers.
Here in the U.S. the oil and gas industries are getting hammered by a perfect storm of low energy prices, rising interest rates and excess production, mostly orchestrated by Saudi Arabia. Layoffs in oil production have decimated the industry and more layoffs are ahead in 2016. This year’s also shaping up to be the year of oil and gas company bankruptcies. Given the strategic importance of oil supplies, taking a more aggressive stance toward keeping that industry above water might not be such a bad thing.
The one bright spot in commodity pricing was that the selloff in equities sparked a spike in gold prices, up $15.41 an ounce in early trading.
Saudi Arabia and Iran
As if the economic situation wasn’t bad enough, two of the biggest powers in the Middle East are squaring off over a religious dispute centered around Saudi Arabia’s execution of a Shiite cleric on terrorism charges. The rhetoric has started to spin out of control as Saudi Arabia cut off diplomatic ties with Iran, a move that was followed today by Bahrain and Sudan also severing diplomatic ties. If cooler heads don’t prevail, this could spiral out of control very quickly.
It would be great to throw some sunshine in at the end and tell you everything looks brighter in the days ahead but that would be a big, fat lie. The truth is days ahead look darker and more ominous than any time in the last decade. Today’s stock market loss could very well be just the beginning.
Trevor Gerszt, America’s Gold IRA Expert, is founder and CEO of Goldco Precious Metals, a privately held retirement services firm in Los Angeles specializing in wealth and asset protection. Trevor also holds a position on the Los Angeles Board of the Better Business Bureau.