Something big has changed.
Stock markets around the world are getting crushed. Some markets are down 20%, 30%, 40%, or more, even those where central banks are pursuing a scorched-earth wealth-effect strategy of mega-QE and negative-interest-rate policies. Something big has changed.
Early Thursday morning, I posted an article [When “Story Stocks” Crash Like this, the Market is Kaput] that mentioned as an aside the inevitable — that there would certainly be “a rally someday that lasts longer than a few hours.” Because in US stocks in 2016, there hadn’t been such a rally.
That “rally” came on Thursday. And it did last “longer than a few hours.” It lasted the entire day! But on Friday, all heck re-broke lose, creating for US stocks what MarketWatch poetically titled, the “worst 10-day start to a year in history.”
A market that can’t put together a dizzying rally after what it has been through for the past three weeks is in serious trouble. And this sort of display of risk aversion into the weekend shows that investors have lost confidence in the markets.
The rout on Friday ignited in Asia, with the Shanghai Composite plunging 3.5% to 2,901, the lowest since December 2014, right through the Maginot Line that the Chinese government last summer vowed to defend. But the “national team” apparently sat at the sidelines. The index plunged 9% for the week. It’s off 44% from the high in June 2015. Since then, over $5 trillion in fake wealth has re-dissolved into polluted air.
The 25% rally in between is gone. It punished all those who’d acted on Goldman Sachs’ prediction last July that Chinese stocks would rally. The Chinese government and government-owned enterprises are big clients of Goldman, and a little favor goes a long way.
The selloff circled to Europe and concluded in North America. The Toronto Stock Exchange dropped 3% for the week, the Dow and the S&P 500 2.2%, the Nasdaq 3.4%. It came after a week when the Dow and S&P 500 had plunged 6% and the Nasdaq 7.3%. Hence the “worst 10-day start to a year in history.”
A lot of individual stocks got crushed, often for reasons that in the times of boundless optimism might not have caused much of a stir, or might even have caused some stocks to rally. At the time, anything caused stocks to rally. It was the time of “consensual hallucination” — consensual because everyone eagerly smoked the same stuff. But this hallucination is fading. Investors are gradually coming to. And they’re glancing wearily at reality.
And they see that reality has some ugly aspects — though they’ve been there for a long time. Investors just chose not to see them:
Intel plunged 9.1%, its largest one-day percentage dive since September 29, 2008. Everyone knows that the PC business is sinking into the mire, that China is slowing down, and that the hype about the data-center business and cloud computing shouldn’t be trusted. But consensual hallucination has kept Intel investors from seeing it — until Intel reported earnings and cut its outlook Thursday afterhours: turns out, PC chip sales plummeted 16% in part due to the slowdown in China, and its data-center business disappointed.
Contagion spread to other semiconductor makers. Micron and Advanced Micro Devices plunged 8%. Qorvo shed 7.2% and is down 59% off its 52-week high. It spread to data-center and cloud specialists, including Rackspace, down 7% for the day and 76% from its peak in early 2013.
Sarepta Therapeutics, with absolute zero revenues over the past three quarters, collapsed 55% to $14.28 on Friday. It had gotten hit by an FDA document, questioning the design of the trial of its treatment for Duchenne muscular dystrophy. Concerning the drug’s effectiveness, the document chastised the company (for wasting everyone’s time and money?) with acidic morsels such as this: “we cannot approve drugs for which substantial evidence of effectiveness has not been established.”
It’s not the first time. Back in September 2013, Sarepta shares had spiked to $54 on a wing and a prayer. The wing got clipped, the prayer failed, and shares plunged, hitting $14 five weeks later. But momentum chasers kept trying. Consensual hallucination.
Sprint shares plunged 10% on Friday to $2.87. It’s at the losing end of a price war. Revenues have dropped 11% over the past four quarters. It has been floating in a sea of red ink for years. It has $61 billion in liabilities, including $32 billion in long-term debt, an impossible nut to crack when you’re always losing money. If it hadn’t been for consensual hallucination, Sprint would have been a penny stock long ago.
Big finance also left some skin behind. JP Morgan -2.0%; BlackRock -4.3%; Wells Fargo -3.6%; Citigroup -6.4%. We won’t even mention energy. No sector was spared.
S&P 500 companies have a problem. Their still immensely inflated stock prices, after a seven-year, Fed-induced wealth-effect rally, are coinciding with revenue declines for four quarters straight, the first such stretch since Q4 2008 through Q3 2009.
Earnings of S&P 500 companies are getting hit too, despite the ingenious ways of financially engineering them into shape and polishing them with adroit accounting moves. Earnings are projected to fall 5.7% in Q4. If this pans out, it would cause an earnings decline of 0.8% for calendar year 2015.
But there were times when investors chose not to see any problems. They were under a consensual hallucination that all asset prices would forever soar, no matter what. That hallucination is now fading. That’s the big thing that has changed.
And it is happening just as the real economy is now getting worse. Read… This is Where Industrial Production Normally Meets a Recession