S&P 500 sheds 2.5pc as global rally falters

The 2016 selloff in US stocks intensified, with the Dow Jones Industrial Average tumbling more than 360 points, as consumer shares led the latest rout in a turbulent start to the year that has erased at least $US1.6 trillion from equities.

An early rally evaporated for a third day as declines of at least 5.8 per cent in Amazon.com and Netflix paced the selloff. Banks sank to their lowest close since May 2014, and energy companies fell as crude wiped out a 4 per cent surge after data showed stockpiles continued to grow. Express Scripts Holding lost 6.4 per cent and biotechnology companies tumbled to weigh on the health-care group.

The Standard & Poor's 500 Index fell past 1900, a level it's closed below only four times in the past 14 months.
The Standard & Poor's 500 Index fell past 1900, a level it's closed below only four times in the past 14 months. Photo: Richard Drew

The Standard & Poor's 500 Index slid 2.5 per cent to 1890.28 at 4pm in New York, its lowest close since September 29. The gauge fell past 1900, a level it's closed below only four times in the past 14 months. The Dow fell 364.81 points, or 2.2 per cent, to 16,151.41, and the Nasdaq Composite Index sank 3.4 per cent, the most in more than four months. The Russell 2000 Index closed in a bear market, sinking 3.3 per cent to its lowest since 2013, and down 22 per cent from a record set in June.

"With energy selling off, we've lost a leg of leadership, which is made worse because we've already been seeing risk-off," said Yousef Abbasi, global market strategist at JonesTrading Institutional Services LLC in New York. "The FANG gang is making new lows, and small-caps are continuing to get pummeled. What you're seeing today is some pretty broad-based weakness."

It was another volatile session following yesterday's whipsaw action in which the S&P 500 capped its first back-to- back advance in three weeks. The Dow on Wednesday travelled more than 470 points from the session high to low.

Concern that turbulence in China's stocks and currency will spread to the global economy just as the Federal Reserve is increasing borrowing costs has spurred declines in markets in 2016. The S&P 500 posted its worst-ever start to a year, sliding 6 per cent last week. The benchmark has declined 11 per cent from its record set in May, and is just 1.2 per cent above the bottom of an August swoon, which was also sparked by anxiety over the impact of China's weakness on worldwide growth.

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According to JPMorgan Chase & Co, this year's tumble is at least partly attributable to robotic selling by quantitative investors who were forced to rebalance their funds when stocks and bonds both fell in January.

"While this implies there is less risk of a sudden market crash vs. August, it is not imminent that these strategies will start buying equities," wrote Marko Kolanovic, the JPMorgan strategist. "Moreover, if volatility keeps on rising, there could be more selling to come."

The Chicago Board Options Exchange Volatility Index rose 12 per cent Wednesday to 25.22. The measure of market turbulence known as the VIX is up 39 per cent in January, on track for its biggest monthly gain since August's 135 per cent jump. About 9.8 billion shares traded hands on US exchanges, 36 per cent above the three-month average.

"If this week has shown us anything, it's that no gain is safe," said Thomas Garcia, head of equity trading at Thornburg Investment Management in Santa Fe, New Mexico. "Equities have just been out of favor early on this year. We've been taking our cues from what's been going on from China, but people seem to be getting numb to that."

The Fed's Beige Book survey of conditions released today said the economy expanded across most of the country in the past six weeks as the job market showed strength that's failing to stoke broad wage pressures. The report underscores the challenge facing policy makers heading into their meeting later this month: The labour market is strengthening without triggering signs of higher wages or inflation more broadly.

Boston Fed president Eric Rosengren said today estimates for US growth are falling, putting the central bank's projected path for rate increases at risk. Chicago Fed president Charles Evans said in comments also today he backs an "even shallower path" for future rate increases than his colleagues.

After this year's selloff brought S&P 500 valuations down to levels last seen in 2014, investors will be turning their attention to a key determinant of stock prices - corporate earnings. JPMorgan Chase, Intel and Citigroup are scheduled to post quarterly results this week. Analysts estimate profits for S&P 500 members fell 6.7 per cent last quarter.

"Corporate earnings could provide some support, especially if the energy and commodities sectors are not as miserable as everyone expects," said Heinz-Gerd Sonnenschein, a strategist at Deutsche Postbank in Bonn, Germany.

Amid the carnage Wednesday, all of the S&P 500's 10 main industries fell, with consumer discretionary and health-care shares the worst performers. Eight of the groups lost at least 1.7 per cent. Utilities were little changed.

"There's big-time negative sentiment in the market right now," said Mark Kepner, an equity trader at Themis Trading LLC in Chatham, New Jersey. "There's a lot of growth uncertainty in general. Without enough news to make it go higher, and with negative sentiment, we started selling off."

Consumer discretionary companies in the benchmark gauge slipped 3.4 per cent, the biggest drop since the August selloff. BorgWarner led with a 9.5 per cent decline after providing 2016 sales guidance that fell short of previous estimates. Netflix lost 8.6 per cent, the most since October 2014, while Ford Motor and Delphi Automotive slumped at least 5 per cent. Home Depot dropped 4.8 per cent, the worst in the Dow, and its steepest retreat since 2011.

The S&P 500 health-care index fell 2.9 per cent to its lowest since September amid losses in drugmaker shares. AbbVie and Celgene decreased more than 5.6 per cent. The Nasdaq Biotechnology Index slid 5.3 per cent to a 14-month low and its ninth loss in 10 days. The gauge is down 18 per cent over the period.

Express Scripts posted its steepest drop in three years after health insurer Anthem, its biggest client, threatened to ditch it for a competitor unless the pharmacy benefit manager can deliver $US3 billion a year more in savings on drug costs.

Industrial companies in the S&P 500 lost 2.3 per cent, snapping a two-day gain. The Dow Jones Transportation Average lost 3.7 per cent, the most in almost two years to its lowest since October 2013. Norfolk Southern and Union Pacific fell more than 3.1 per cent, while Boeing decreased 2.9 per cent.

CSX, the largest rail carrier in the eastern US, fell 5.7 per cent to its lowest level since February 2013 as demand for rail cargo is expected to drop this year in what CEO Mike Ward called a "freight recession".

Williams Cos plunged nearly 18 per cent, the steepest since 2002 and the most among energy companies today as credit downgrades and slumping energy prices exacerbated concerns over the $US38 billion deal for the pipeline company to be bought by Energy Transfer Equity LP. Valero Energy and Tesoro tumbled more than 8.6 per cent.

In an ironic twist, Chipotle Mexican Grill, the worst non-energy performer in the S&P 500 during the last three months, was the day's second-best performer. The shares rose 5.9 per cent, the most since July after executives told analysts at an investor conference that it can win back the trust of customers and restore its industry-leading restaurant margins by 2017.