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7 reasons stocks are cratering

Let's be blunt: Stocks are off to a terrible start this year. U.S. financial markets nosed down Thursday, continuing a decline from the previous day's session that saw the benchmark Dow Jones industrials index drop below the 17,000 level for the first time since October.

How are China's stock plunge, trading halt impacting U.S.?

The result is some nasty sell-offs in popular, large-cap stocks. Apple (AAPL) on Wednesday lost 2 percent on worries about slowing demand for iPhones, with the stock testing the $100 level first reached in the summer of 2014.And Disney (DIS) dropped back to levels not seen since October, down 17 percent from the highs of late November.

What's driving investors toward the exits? Here's a quick look at seven factors in play.


China has been in focus this week amid exchange rate volatility, turbulence in the country's credit markets and a batch of weak economic data. Trading on the Shanghai Composite was again cut short on Thursday after it fell 7.3 percent, triggering "circuit breakers" that automatically halt activity when stocks fall at least 5 percent. That followed another 7 percent selloff on Monday, which also halted trading, following the release of unexpectedly weak manufacturing numbers.

The pattern suggests that a retest of the August-September lows in China are likely, something that at the time pulled U.S. markets down in concert with tumbling Chinese equities.


Sentiment has been soured by rising tensions between Iran and Saudi Arabia after Riyadh executed a well-known Shiite cleric, resulting in protests and the breaking of diplomatic ties. This has actually resulted in additional pressure on crude oil because it lessens the already diminished odds of a unified production cut by OPEC to stabilize energy prices.

Adding to the concerns was North Korea's overnight claim that it detonated a miniaturized hydrogen bomb, which subsequent data cited by the U.S. government cast doubt on. Still, it represents an unneeded increase in tensions on the Korean peninsula.

Crude oil

Crude oil was slammed another 5.5 percent on inventory concerns, taking prices below the $34-a-barrel level on Wednesday. The U.S. Department of Energy reported that gasoline inventories rose by 10.6 million barrels, the largest weekly increase since May 1993.

The supply glut shows no sign of stopping: According to Yardeni Research, world crude oil production rose to a record 95.2 million barrels per day over the 12 months through November. This is up at a 2.4 percent annual rate, the fastest growth since July 2011 despite the wipeout in oil prices.

Economic data

On the U.S. economic front, the misses keep rolling in: The November factory goods and durable goods reports were both disappointing. Factory orders dropped for the 13th month in a row, which is something that has never happened outside of a recession.

As a result, the Citigroup U.S. Economic Surprise Index -- which measures where the economic data is coming in against analyst expectations -- dropped to fresh lows not seen since early 2015. Historically, stock prices tend to track the ups and downs of economic surprises.

The Fed

The release of the December Federal Reserve meeting minutes, covering the policymakers' decision to raise interest rates for the first time since 2006, was largely a nonevent confirming what's already known: As long as job gains continue, and inflation stabilizes, additional rate hikes are coming in 2016.

That was supported by the strong ADP private payrolls report, which posted its biggest monthly gain since 2014. That sets the stage for both a solid December payroll report on Friday and reinforces the Fed's forecast for four 0.25 percent interest rate hikes this year.

Fed Vice-Chair Stanley Fischer commented that this forecast was "in the ballpark" and that market expectations for just two rate hikes were "too low." Expect further pressure on the bond market, especially in high-yield "junk" bonds, as interest rates drift higher.


The fourth-quarter earnings season will kick off on Jan. 11 when Alcoa (AA) reports. Because of the ongoing drags of the strong dollar (which will weigh on U.S. corporations' foreign earnings) and weak oil prices (which will hit the energy sector), the S&P 500 is expected to post its third consecutive quarterly earnings decline, according to FactSet data.

That's something that hasn't happened since the financial crisis. Specifically, earnings are forecast to drop 4.7 percent over last year.

Safe havens

And finally, with all of this weighing on the minds of investors, it's no surprise that safe haven assets like gold and Treasury bonds have been perking up this week. The SPDR Gold Trust (GLD) jumped over its 50-day moving average on Wednesday to return to early November levels.

The last time gold consistently outperformed stocks was during the market turmoil of 2011 surrounding the U.S. credit rating downgrade and budget standoff in Washington, D.C.

If the volatility we've seen so far in January continues, and casts a pall over the rest of the year, keep an eye on the yellow metal.

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