Three Reasons Behind The New Year Sell-off

2016 certainly came in storming. Right off the bat, investors were met with a major sell-off.

The U.S. stock market was, at one point, suffering through its worst opening day of a new year since 1932. It ultimately regained its footing, relatively speaking, and January 4, 2016 ended up being the worst start to a new year since 2008.

So what the heck is going on?

Well, it’s a continuation of last year’s woes. December, normally the strongest month of the year, was down – and now, there’s an extra dose of geopolitical concern on top.

Point the Finger at China

When things go wrong, Washington and Wall Street have one trait in common: They love to place the blame on those darn foreigners.

In most cases, China is the convenient whipping boy. The same was true on Monday, as China was blamed for the selloff.

The mainland Chinese stock markets plunged for a number of reasons – not the least of which is that their newly enacted circuit breakers actually accentuated the selling.

The selling itself was triggered by worries over the end of the lockup period, imposed by Beijing after the August swoon. Additionally, IPOs are resuming, draining the market of liquidity.

Despite what CNBC says, though, the selloff was not triggered by worries about the economy.

The Purchasing Managers Index (PMI) on manufacturing activity came in relatively close to expectations. On the other hand, the U.S. Institute of Supply Management (ISM) Manufacturing Index fell to a five-year low, but that hardly got any play on U.S. media outlets.

Chinese investors aren’t stupid. They know that the services sector now accounts for roughly half of the country’s economic activity. And that sector is soaring.

Plus, Chinese investors know that more bumps in the road are coming as China transitions to a more services-focused economy. Thus, there’s no reason to panic sell on one manufacturing number.

The real reason for the China concerns was that the yuan hit a five-year low versus the dollar. In fact, the whole selloff through Thursday centered on the fact that China’s currency fell by 1% versus the dollar. So it’s much ado about 1%.