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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 per cent below its historical average, jumped 78 per cent 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 per cent, to 17,280.83. The Standard & Poor's 500 Index slid 3.5 per cent to 2,002.33, its biggest drop since May 2012. The MSCI All-Country World Index declined 3.8 per cent, 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 per cent and Brazil entered a bear market, falling more than 20 per cent from a September peak.
Money managers speaking after the December 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 per cent on December 5 to about 8 per cent 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 materialises.
'Throw up'
"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 per cent during the week and is down 4 per cent since November 25. The S&P 500 Retailing Index lost 0.6 per cent, and 1.2 per cent 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."
Knee-jerk
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."
Treasuries rallied, with 10-year yields reaching the lowest in eight weeks, and the yen had its best week in 16 months.
CRUDE JOLT
- More than $1.2 trillion was erased from global equities over the past five days, as the drop in crude prices raised concern over the strength of the global economy
- The 46% drop in crude since June has hurt the economies of oil-producing countries from Russia to Nigeria
- The US 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
