Stocks start 2016 with a big fat thud

Dow Jones down triple digits on the first trading day of 2016

The new year is off to a less than joyful start on Wall Street, which followed the rest of the globe in embracing an equities rout fueled by fears about what's ahead for the world economy.

"All the fears of the year ahead are on display today," said Jim Russell, vice president and portfolio manager at Bahl & Gaynor. "We're hopeful that one day does not a trend make."

Still, Russell does think U.S. equities are in for a wild ride in 2016, predicting that they will end the year not far from where they began. And unlike during the six-year bull market that followed the housing crash, the Federal Reserve is unlikely to engage in another massive round of bond purchases to stimulate economic growth and push up stock prices, the strategist added of his expectation that markets will remain volatile.

"Volatility is likely to rip through financial markets in the first half of 2016," noted Nigel Green, CEO and founder of the deVere Group, in an email. "Today's turbulence is only the beginning."

The main culprit is nothing new, with China's slowing growth, which walloped the global economy in 2015, also rearing its head on the first day of trading this year.

"It's very clear the U.S. markets are taking their cue from a very difficult Chinese equity market overnight, where they had to close the markets because of volatility, which carried over into the European markets and the United States," Russell said. "Global growth is starting out 2016 with questions marks."

Stocks fall on first day of 2016 trading

Emerging markets fell the most since August after data illustrating a slowdown in manufacturing triggered a 7 percent selloff that halted trading in Shanghai. The Stoxx Europe 600 Index lost 2.5 percent, marking its worst beginning to a year ever.

The weak factory numbers from China were joined by another measure indicating the fastest contraction in half a dozen years in U.S. manufacturing.

Coming off losses that had it down as much as 467 points, the Dow Jones Industrial Average (DJI) lost 276 points, or 1.6 percent, to 17,149, with the blue-chip index taking its hardest opening day hit in eight years. Financials led the decline on the S&P 500 (SPX), which dropped 31 points, or 1.5 percent, to 2,013. The Nasdaq Composite (COMP) shed 104 points, or 2.1 percent, to 4,903.

The underlying issues that plagued investors for the final three months of 2015 continue in the new year, with reduced demand and a stronger U.S. dollar among the factors keeping a lid on commodity prices.

The benefits of low energy costs and interest rates, combined with a healthy jobs market, has failed to provide as much support to the U.S. economy as some had hoped. Some experts peg lackluster consumer spending over the holiday season to stagnant wages, with average hourly earnings rising just 2.7 percent last year from 2014.

Another trouble spot for the U.S.: shrinking corporate profits. In the final three months of 2015, earnings per share for companies listed on the S&P 500 slid more than 5 percent. That represents the second straight quarter that earnings have fallen, the first back-to-back decline since 2009, according to S&P Capital IQ. Historically, earnings growth has averaged about 8 percent per quarter.

The main factors weighing on corporate profits are an ongoing slump in oil prices, which has slammed the energy sector, and the strength of the U.S. dollar versus other global currencies, which hurts domestic manufacturers by raising the cost of their products overseas.

Investors will get a more definitive read of how corporate America fared at the end of 2015 with the release of quarterly earnings in two weeks, and more importantly, what companies project for the future.

"Our guess is that many will provide a cautious outlook at that time. That's when we'll see those numbers come down a bit," said Russell of consensus estimates that expect earnings to be up 7-to-8 percent in 2016 versus 2015. "We're starting off 2016 with the earnings picture in question."

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