Happy New Year, everything is terrible

You might want to go back on vacation.
You might want to go back on vacation.
Image: AP Photo/Andy Wong
We may earn a commission from links on this page.

Last year was not a good one for stocks. All told, the S&P 500 ended 2015 with a 0.7% loss.

And a few hours into 2016, things don’t look so hot either.

The trading year tumbled out of the gates Monday (Jan. 4), with the S&P down a bit more than 2%. The Nasdaq is even worse. China set the tone early, with its notoriously volatile stock markets stumbling. The Shanghai Composite index fell 7% on the day, triggering a newly installed circuit breaker.

There were plenty of reasons to pick from. For one, a key gauge of Chinese manufacturing continued to show the industrial sector contracting, the 10th straight month of shrinkage.

But perhaps more troubling, in the US, an important measure of manufacturing activity stayed in negative territory for the second straight month, adding evidence to the idea that the US industrial sector is weakening.

Meanwhile, on the political front, the long simmering Sunni-Shiite proxy war in the Middle East seems to be on the verge of going official. Saudi Arabia cut off diplomatic ties to Iran amid an escalation of tensions there. Jitters over the matter even managed to push oil prices up a bit.

Reason for investors to panic? Meh. The China slowdown is old, old news. And 7% stock market swings are pretty common there.

And while the US data is worth a raised eyebrow, it’s fair to assume that low oil prices are weakening the manufacturing sector, which will need to churn out far less drilling and mining equipment amid a glut of oil.

On that point, in a recent note, Goldman Sachs analysts pointed out that, although business capital investment was puttering along at roughly 2.2% in the third quarter, much of the weakness was centered in the oil industry. Outside oil and energy, business capital expenditures are humming along at 4%-6%, Goldman says. True, capex and manufacturing are different animals. But I’d be willing to bet that something similar is afoot in the manufacturing sector.

On the other hand, the sight of weakness from the world’s two largest economies to start the year isn’t exactly heartening. And the prospects of a new violent conflagration in the Middle East won’t do much to hearten investors either.