China sell-off fuels stock rout gloom

A slowdown in China’s manufacturing sector continues to spook global markets. Zhong Min / EPA

Investors who were bloodied in the year-opening stock rout will be hard pressed to find any salve this week.

With prospects dimming for a strong start to earnings season and worries about slow growth in China continuing to overhang the market, even a price-driven rally may not last beyond a day or three, say longtime market watchers.

“This is a tsunami of negative psychology being driven by China,” said Phil Orlando, the chief equity market strategist at Federated Investors in New York.

“There is nothing we can do except step back, hunker down and wait for the carnage to play out.”

The S&P 500 suffered its worst five-day opening to a year on record going back to 1929 and the Dow notched its worst start to the year on record dating back to 1897.

Several analysts have already cut their earnings targets, with Deutsche Bank reducing its fourth-quarter forecasts and admitting it was unsure how much to lower its his year’s estimate because of the continued slump in oil prices.

The technical picture for stocks has also deteriorated with the week’s declines. The previous support level of 1,950 now acts as resistance, while the August 2014 lows around 1,870 are seen by market participants as the next support level, leaving the index vulnerable to more losses.

Stocks could be poised for a quick but not lasting rally, said Jeff Saut, the chief investment strategist at Raymond James Financial in St Petersburg, Florida, as many stocks are currently oversold.

“We are spring-loaded here. The question is, is this just going to be a one-one and half to three-day throwback rally before we start back down again?”

Earnings season is set to begin next week with Alcoa reporting quarterly results after the close tomorrow and several major banks reporting at the end of the week.

But the outlook there is not bright. Thomson Reuters data shows earnings for the fourth quarter are expected to fall by 4.2 per cent, down from the 3.7 per cent decline expected a week ago and the 1.1 per cent growth expected on October 1.

“There is cautiousness about the earnings season,” said Ken Polcari, the director of the NYSE floor division at O’Neil Securities in New York. After investors see the first few reports of the season, “they will start to feel more comfortable – or not”.

In the end, it may come down to what started the sell-off in China as any signs of stabilisation may allow investors to focus on the overall US economic environment.

Friday’s solid payrolls report hinted at a strengthening US economy. Last month retail sales reported on Friday are likely to be the only report in the week ahead to have any impact. “It is the resilience of the US, that is the key, not that it has to pick up the pace with China slowing down,” said Kate Warne, an investment strategist at Edward Jones in St Louis, Missouri. “It’s not a super environment, but an OK environment.”

Follow The National's Business section on Twitter