While 2015 went out like a bang, 2016 is creeping in on a whimper. Asian, European and U.S. markets have kicked off the new year on a down note following a worldwide stock sell-off sparked by a weaker-than-expected manufacturing report in China. All FANG stocks — the acronym for Facebook, Amazon, Netflix and Google — closed lower after investors bid up shares in these tech powerhouses in 2015 on the back of big changes in the way consumers and business communicate, shop and entertain themselves.
The technology-focused Nasdaq plunged 2.1 percent on the first day of trading, the blue chip Dow Jones industrial average tumbled 1.6 percent and the broad-based S&P 500 dropped 1.5 percent.
Chinese authorities suspended trading in the country earlier Monday following a 7 percent market drop after a massive selling frenzy. Tensions between Saudi Arabia and Iran added to further unease among investors.
The concern is how resilient the tech sector can remain if the global economy as a whole slogs along
Uncertainly Continues
Analysts are divided on how they view the coming short term and long term performances across the global markets and are cautious about predicting the outcome of the current selloff. Past trends have shown that the way the year starts is an indication of its future realization. With the Dow bringing in the new year at its very worst since 2008, prospects for the coming year are far from optimistic.
Weighing heavily on the markets is an already weaker market in the second half of last year as well as sluggish earnings, and pressure from a global growth slowdown. Much of the pessimism extends to the tech sector which is more tightly enmeshed in the economy as a whole than ever before and its future is subject to the same forces that afflict everyone else. Tech companies are very dependent on sales to China but the declines in Japan, Europe and other emerging markets are part of the overall problem.
Tech Stocks Buffered S&P
The concern is how resilient the tech sector can remain if the global economy as a whole slogs along since any continued softening in tech shares could mean bigger problems for the market as a whole. Last year, strong tech stocks like Amazon and Alphabet compensated for struggling companies to bolster up the S&P 500 index, which, despite this buffer, ended the year relatively flat.
Analysts point to Facebook, which was also down on the first day’s trading. According to their thinking, Facebook may seem less at risk since it doesn’t sell goods like Amazon, but it is still highly affected by global trends since it is dependent on advertising revenue and is highly reliant on overall economic activity that drives the sales and earnings of media companies.
Many tech companies may have become overvalued during the last few months and this may have led to the severe drop in prices. The high valuations for tech stocks make them more expensive compared to other types of stocks and according to one analyst, a lot of tech companies are “hoping to grow their profits in the future to eventually match the valuations. That's why tech stocks are being hit so hard."
An updated reading on the nation's economy will be announced on Friday with the release of the latest jobs report, measuring December activity for employment in the United States and despite the retreat for technology shares, some experts believe tech will remain a relatively hot ticket for investors in 2016. Some investors seem prepared to withstand the tumult of a roller-coaster year for the stock market. There’s nothing new under the heavens.