Not since the recession was in full swing have stocks performed this poorly at the start of the year, with the Dow Jones Industrial Average losing another 0.8% on Tuesday as ongoing weakness in crude oil weighs on sentiment. The S&P 500 lost 0.9% for its fifth straight decline, the Nasdaq Composite lost 1.3%, and the Russell 2000 lost 1.7%. Crude oil lost another $2.18 a barrel to finish at $47.86.
This is the longest losing streak for equities in over a year.
The collapse in energy prices — which could seem some relief on Wednesday morning then the government’s latest oil inventory report is released — raises concerns not only about the profits of energy companies, but calls into question the health of the high-yield bond market, the stability of oil-exporting economies and the vitality of the global economy.
Contagion is spreading, with U.S. Steel (X) announcing today that will lay off more than 750 workers in Ohio and Texas on lower anticipated demand for steel pipes as oil and gas companies pull back on exploration and investment spending. Most of the U.S. shale oil industry is simply unprofitable with energy prices at current levels; and before prices can recover, production levels will need to be curtailed.
Investors were also troubled by a batch of weak U.S. economic data — specifically, the ISM nonmanufacturing survey as well as factory orders — suggesting that the country cannot remain invulnerable to slowdowns in Europe and Asia. This is the message being sent by the government bond market, with U.S. 10-year Treasury yields dropping below 2% for the first time since early 2013. German and Japanese 10-year yields settled at new record lows.
This is raising concerns that the global economy could be headed straight into a nasty bout of deflation, one that could undermine confidence in the money printing efforts of the major central banks; especially if the situation in the eurozone continues to deteriorate heading into the Greek election on January 25.
Indeed, stocks dropped despite a report in the Dutch press that the European Central Bank was considering three different government bond buying stimulus options — something that the bank has been teasing investors with since 2012. But after so much foreplay, the risk now is that the ECB disappoints with the final product.
The potential electoral victory of the anti-bailout Syriza party in Greece makes the ECB’s task much more difficult.
Other developments worth mentioning: The appearance of another “Hindenburg Omen” — the second in as many days — as market breadth deteriorates; the buying interest pouring into precious metals as investors seek a safe haven with the related mining stocks enjoying a lift; and a possible nascent breakdown in the all-important yen carry trade as the euro drops hard.
In response, I’ve recommended the MarketVectors Junior Gold Miners (GDXJ) to my Edge subscribers — with the position jumping 6.5% out of the gate. Edge Pro subscribers are benefiting from the weakness hitting financial stocks, with the Jan $55 Citigroup (C) puts recommended on December 11 up nearly 150%.
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