In the markets:
Stocks declined as investors reacted early in the week to further weakness in the energy complex and later in the week to a mixed job report and severe weakness in technology and biotech shares. For the week, the Dow Jones Industrial Average declined -261 points to 16,204 (at -1.6%, this was the least-damaged index in the US). The LargeCap S&P 500 declined -3.1%, the MidCap S&P 400 declined -2.9%, and the SmallCap Russell 2000 ended down over -4.8%. The tech heavy NASDAQ, which was being propped up by a few highfliers, collapsed this week by -5.4% as the air came out of those highfliers in a big way. See the “Finally” section for more.
In international markets, Canada’s TSX remained relatively flat, down -0.45% for the week, as natural resources – particularly precious metals – held up. Markets were under pressure in Europe as Italy plunged -7.5%, Germany’s DAX declined -5.2%, and France’s CAC 40 gave up -4.9%. The United Kingdom’s FTSE 100 ended down -3.8%. In Asia, Japan’s Nikkei declined -3.9%, while Hong Kong’s Hang Seng lost -2%. However, China’s Shanghai Stock Exchange, an exchange with little foreign involvement, ended the week up +0.95%.
In commodities, precious metals are beginning to shine as an ounce of silver rose +5.4% and Gold gained +$55.70 an ounce to $1174.10 an ounce. Crude oil, though, continued its decline as a barrel of West Texas Intermediate dropped more than -$2 in the course of the week (after having been down more than -$4 in mid-week).
In U.S. economic news, job growth slowed more than expected last month with the economy adding only 151,000 jobs, but the report came in strong in other ways that some analysts felt may give the Federal Reserve the evidence it needs to raise rates again. The jobless rate fell to 4.9%, the lowest since February 2008, and the labor force participation index improved for a 3rd straight month to 62.7%. Retail added 58,000 jobs last month; however some analysts question that number due to the announced layoffs of several major retailers which surged last month. Retailers announced 22,246 layoffs after the holiday season, up from just 6,700 a year ago. Wal-Mart alone is cutting 10,000 jobs and closing 154 stores. Macy’s is eliminating 4,500 positions and closing 40 stores. Transportation and warehousing added 45,000 jobs, and according to the Labor Dept., even manufacturing added jobs - a surprising 29,000 —the best gain since early 2012. A tighter labor market “should” lead to higher wage growth and “should” put upward pressure on inflation – but there’s no sign of either yet.
But the U.S. private-sector jobs picture as reported by payroll processing firm ADP from surveys of clients is not as positive in the manufacturing space as the government’s report. According to ADP, instead of expanding as reported by the government, manufacturing jobs actually fell fractionally, down -0.1% versus a year earlier -matching the worst reading since September 2010.
The Institute for Supply Management (ISM) report also showed manufacturing contracting, for the 4th straight month in January. The index rose +0.2 point in January, but the slight improvement was from a downwardly revised 48 that matched the worst reading since June 2009 (sub-50 readings = contraction). Export orders deteriorated while the jobs reading was the worst since May 2009. Manufacturing has taken a hit as a strong dollar and weak global growth has weighed on manufacturing and the rest of the economy hasn’t taken up the slack. On a positive note, the new orders and output sub-indexes rose back above 50 into expansion, and Markit’s U.S. manufacturing index climbed to 52.4 in January from December’s 3-year low of 51.2.
Growth in the service sector fell to a 2-year low as the Institute for Supply Management’s nonmanufacturing index declined 2.3 points in January to 53.5—the lowest since February 2014. Of particular concern to economists is that this was the measure’s 3rd straight decline. Export orders had their sharpest decline since March 2009. Import orders were their weakest since summer of 2012. The jobs index indicated slower hiring. Markit’s services index, similar to ISM’s, also declined -1.1 points to 53.2, confirming ISM’s number and the weakest reading in over 2 years.
Personal income matched economists’ estimates rising 0.3% in December according to the Commerce Department. Consumer spending was unchanged and spending on consumer durables declined. The Commerce Department reported that consumer spending slowed to an annual growth rate of 2.2% in the 4th quarter.
Construction spending missed expectations of +0.6% growth, but remained ever so slightly positive in December up +0.1% to an annualized $1.12 trillion. IHS Global Insight economist Patrick Newport stated that the construction sector “lost all momentum in the fourth quarter.” Private residential spending gained 0.9%, bringing the annual gain to +8.1% - the weakest since May 2012. Private nonresidential spending slipped -2.1%, while public construction spending rose +1.9%.
In the Eurozone, the Purchasing Managers Index (PMI) fell -0.9 in January to 52.3. The reading matches the flash reading and signals a slower rate of expansion – still positive, but not robustly so. Output growth and orders weakened and the output prices gauge hit a 1-year low. Overall, analysts believe the report won’t prevent the ECB from adopting an even more accommodative monetary easing policy, perhaps as early as March. On a positive note, Eurozone unemployment decreased to a 4 year low in December, to 10.4%. It’s the lowest overall unemployment rate since September 2011.
In China, the government’s official manufacturing index remained in contraction for a 6th straight month, falling 0.3 point in January to 49.4 (sub-50 readings = contraction). The China National Bureau of Statistics reported that the latest reading reflected weak export orders and efforts to curb overcapacity. The services gauge declined to 53.5 from December’s 16-month high of 54.4. Private-sector research firm Caixin reported that its manufacturing index came in at 48.4. It was the 11th straight month of declining activity, per Caixin. Caixin’s index focuses on small and midsize private firms, versus the government’s reading that focuses on larger state-owned enterprises.
Finally, this week’s overall market declines, bad as they were, masked a much worse development in the tech space. While the overall NASDAQ dove -3.25% on Friday, tech names such as LinkedIn and Tableau Software each plunged by over -40% - in a single day. Thirteen other U.S. software companies sank by at least -10%, and another 15 dropped over -5% on Friday. Newly public companies such as New Relic, HubSpot, and Zendesk were all down over 20%. Tableau’s comments were of particular concern to analysts because the company warned of “some softness in spending, especially in North America.” Analyst Matthew Hedberg, of RBC Capital Markets, stated “This is the first time we have heard a high-quality enterprise software firm cite a slowdown in I.T. spending.”
LinkedIn’s -43.6% plunge was the steepest drop in its 5 year history and wiped away almost $11 billion in market value and all gains since 2012 - in one day. The business/social network forecast 2016 revenue growth of 20-22%, but expectations had been for 30% growth. LinkedIn cited global weakness as one of its chief concerns. The following graphic illustrates the recent plunges in many of high-tech’s previous highfliers:
(sources: all index return data from Yahoo Finance; 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)