Epic collapse to record recovery
Thirteen dramatic weeks that shook up Wall Street
The first trading day of 2016 was terrible, but nothing compared to the epic collapse in stocks that followed.
When Wall Street opened Jan. 4, the Dow plunged 276 points. By the end of the week, the blue-chip stock gauge was down nearly 1,100 points, or 6.2% — its worst start to a year ever.
A bull market in doom and gloom took hold quickly, and the selling intensified. RBS, a major global bank, told clients to “sell everything.” Longtime mega-bear Albert Edwards, a global strategist at Societe Generale best known for his prediction of an “ice age” for financial markets, warned that the U.S. stock market could fall 75%. Warnings of a re-
peat of the financial crisis in 2008-09 grew louder.
The opening-year freefall got Wall Street the closest it had been to a bear market since the financial crisis. Now, the stock market has staged a stunning comeback. Thursday, as trading ended for the first quarter, the damage had been erased, and the stock market was back in the black for 2016, just 3% from all-time highs.
“Investors came into the year believing the financial markets were in the critical care unit but have come around to realize that the health of the U.S. and global economy, while hardly stellar, are not as dire as first thought,” says Joe Quinlan, chief market strategist at U.S. Trust.
The bears definitely had a lot of ammunition to make their case: Chinese stocks were crashing. There were fears Beijing ’s debtfueled economy would follow suit. Oil was in freefall. Bank stocks were tanking. The U.S. dollar was climbing, delivering a hit to earnings of U.S. multinationals and emerging markets. Global markets turned turbulent and wildly volatile. The Bank of Japan pushed borrowing costs into negative territory for the first time.
Adding to the market’s negative zeitgeist, Wall Street feared the Federal Reserve was on the verge of making a big mistake and hiking short-term interest rates too soon and too much in 2016.
At the peak of pessimism Feb. 11, all of the major U.S. stock indexes were down more than 10% for the year. A bear market, or a drop of 20% or more from a prior high, looked all but certain. That day, the Dow Jones industrial average closed nearly 15% off its record high in May 2015. The benchmark Standard & Poor’s 500 was down 14.2%, and the Nasdaq composite was down 18.2%.
“It feels like global stocks packed in an entire year’s worth of ebbs, flows and emotion into January alone,” says Brian Belski, chief investment strategist at BMO Capital Markets.
Then everything changed. One by one, the fears and obstacles that had put the U.S. stock market on the brink of its first bear mar- ket in seven years suddenly dissipated, creating tailwinds where there were once headwinds. The market began its march back, leading to a rally of 13% that has pushed stocks out of danger.
Along the way, there were key turning points, market-saving moves and words from influential market players that put a floor under stock prices and delivered a jolt of newfound market momentum and sparked renewed optimism in stocks.
Roots for the rebound go back to Jan. 27, when Federal Reserve chair Janet Yellen surprised markets by not hiking interest rates and sending out a warning flag regarding the mounting risks from abroad.
“The Fed’s soothing words helped save the day,” says Dan Seiver, a faculty member in the economics department at Cal Poly-San Luis Obispo.
Edward Yardeni, chief investment strategist at Yardeni Research, said this in a research report: “Thanks Again, Fairy Godmother! Snow White didn’t have a fairy godmother. However, we do: Fed Chair Janet Yellen.”
On Feb. 11, the same day the stock market bottomed out for the year, JPMorgan Chase CEO Jamie Dimon sent a vote of confidence to his beleaguered bank’s shares — and the stock market as a whole — when he plunked down more than $25 million to buy half a million shares of JPMorgan.
“A lot of credit has been given to Jamie Dimon and his purchase of JPMorgan shares, and while that probably helped sentiment, I don’t think it should be cited as the cause,” says Paul Hickey, co-founder of Bespoke Investment Group.
Even before the nadir Feb. 11, there were signs beneath the surface the market was in bottoming mode. Energy prices had stopped going down, and the number of stocks hitting fresh 52-week lows was no longer expanding.
It’s no coincidence that on the same day stocks bottomed, so did U.S.-produced oil when its price hit a 13-year low of $26.21 a barrel. That was another key “turning point” that sparked the market’s recovery, says Jack Ablin, chief investment officer at BMO Private Bank.
When oil, which was down nearly 30% in 2016 alone and 80% from its high, stabilized, that lifted pressure off energy firms that were struggling to make ends meet and pay off loans because of the crashing price of oil. Rising oil prices also relieved pressure in credit markets tied to the oil patch.
In the weeks that followed, the stock market got another boost from the additional stimulus measures from the European Central Bank, steps by China to steady its economy and wild currency swings, a slew of solid economic data in the USA that allayed recession fears and a sharp rally in distressed assets powered by bearish investors reversing their negative bets.
Lumped together, these drivers put the rally on a more sustainable path, says Bo Bejstrup Christensen, chief analyst at Danske Invest.
Yellen added to the bullish tone and turnaround late in the quarter when in mid-March, the Fed dialed back its plans for interest rate hikes this year from four to two.
Next up: the second quarter.