Signs of an improving economy did nothing to shield stocks from oil’s freefall as the Dow Jones Industrial Average had its worst week since 2011, volatility surged and fund managers said anxiety is building among clients and themselves.
More than $1.2 trillion was erased from global equities over the five days, as the drop in crude below $58 a barrel raised concern over the strength of the global economy. The Chicago Board Options Exchange Volatility Index, a measure of trader anxiety that has spent most of the year hovering about 25 percent below its historical average, jumped 78 percent as oil’s impact rippled through financial markets.
“This week was a bit of a game changer,” Marshall Front, chief investment officer and chairman of Front Barnett Associates LLC, said by phone. “With oil prices falling there has to be a lot of reassessing going on.”
The Dow lost 677.96 points, or 3.8 percent, to 17,280.83. The Standard & Poor’s 500 Index slid 3.5 percent to 2,002.33, its biggest drop since May 2012. The MSCI All-Country World Index declined 3.8 percent, also the most since 2012. The worst rout in Greek equities since 1987 sent European shares to their biggest weekly slump in more than three years. Canadian stocks plunged 5.1 percent and Brazil entered a bear market, falling more than 20 percent from a September peak.
“People are still nervous about the oil price and the European situation is worrisome,” John Carey, a Boston-based fund manager at Pioneer Investment Management, which oversees about $230 billion, said. “Consumer confidence numbers look good and retail sales were pretty strong, the domestic picture is encouraging. But one school of thought is that the rest of the world is going to drag the U.S. down with it.”
Money managers speaking after the Dec. 12 close said the speed of oil’s plunge was taking a psychological toll in a market where the S&P 500’s 2014 return has slipped from more than 12 percent on Dec. 5 to about 8 percent now. Philip Orlando, who helps oversee $350 billion as New York-based chief equity market strategist at Federated Investors Inc., said he’d “re-run models” on Monday and see if a rebound materializes.
“It may be that smart money heard things that the long money crowd didn’t that worked its way into the market in the last two hours,” Orlando said by phone. “Bottom line is, you pay attention to fundamentals and the fundamentals are solid, and then you look at your screen and you want to throw up.”
For two weeks, industries that might benefit from lower oil have been caught in the selloff.
The Dow Jones Transportation Average dropped 3.4 percent during the week and is down 4 percent since Nov. 25. The S&P 500 Retailing Index lost 0.6 percent, and 1.2 percent the week before.
“The dramatic change in oil price is a disruptive event and it causes people to rethink their views on the world,” Erik Davidson, who helps oversee $170 billion as deputy chief investment officer at Wells Fargo Private Bank, said via phone.
“Anyone that’s had exposure to equities this year, they’ve done well, so there’s certainly a lot of people that are now likely to be finding themselves a little overexposed here and will be trimming back and redeploying that cash.”
Rich Weiss, the Mountain View, California-based senior portfolio manager at American Century Investment, which oversees $140 billion, said he’s not changing his stock holdings, though one of his global funds bought VIX futures to hedge equity losses.
“We’re not knee-jerk reacting just because the market is taking off a little steam,” Weiss said by phone. How long the selling lasts “depends critically on whether the U.S. is able to isolate itself and continue on its recovery course, in which case, this will be short-lived,” he said.
“Or, on the other hand, if the international economies drag it down, then that unfortunately will not be short-lived.”
Treasurys rallied, with 10-year yields reaching the lowest in eight weeks, and the yen had its best week in 16 months.
Oil tumbled to a five-year low after the Organization of Petroleum Exporting Countries cut its forecast for how much crude it will need to provide in 2015 and the International Energy Agency forecast weaker consumption and increased supply from countries outside of OPEC.
The 46 percent drop in crude since June has hurt the economies of oil-producing countries from Russia to Nigeria. The U.S. is producing the most oil in three decades and OPEC members have pumped more than the group’s target level for each of the past six months.
The selloff in crude comes amid signs of slowing growth in economies from China to Europe. Japan has already slumped into its fourth recession since 2008, and Russia is heading toward its first since 2009. Swaps traders are almost certain Venezuela will default as the rout in oil pressures government finances and sends bond prices to a 16-year low.
“Oil’s drop is a canary in the coal mine for economic prospects in 2015,” Chad Morganlander, a money manager at St. Louis-based Stifel Nicolaus & Co., which oversees about $160 billion, said in a phone interview. “Investors are deleveraging risk. There’s a convergence of disinflationary trends, as well as a deceleration of global economic growth, which is sending investors to the sideline.”
Concerns about weak inflation have raised pressure on central banks to step up support measures. Meanwhile, the Fed is ending its stimulus program as data indicates the U.S. economy is improving.
The S&P 500 climbed 0.5 percent on Dec. 11 after a report showed retail sales rose in November by the most in eight months, as shoppers benefited from an improving job market and cheaper fuel. Separate reports showed jobless claims fell in the latest week while consumer confidence increased.
Investors are scrutinizing economic data before the Fed’s policy meeting in the coming week to help determine the timing of any increase in interest rates. Divergences among markets in the U.S. and elsewhere highlight the challenge facing the Fed in its quest to move beyond crisis-fighting mode and raise rates for the first time since 2006.
The S&P 500 has advanced 8.3 percent in 2014, heading for a third year of gains, fueled by better-than-forecast economic data and corporate earnings.
Nine of 10 main industries in the S&P 500 declined during the week, with energy stocks losing 8.1 percent. Telecommunications and materials shares dropped at least 5.8 percent. Utility companies were little changed, gaining less than 0.1 percent.
Nabors Industries Ltd. led declines among energy companies, plunging 18 percent to $10, the lowest since March 2009. Exxon Mobil Corp. and Chevron Corp. each tumbled 7.7 percent. Boeing Co. and Caterpillar Inc. were the worst performers in the Dow for the week, retreating at least 8.4 percent.
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