Five things the U.S. stock market is worried about after last week's rout

Mon Jan 11, 2016 1:13am EST
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By David Gaffen

NEW YORK (Reuters) - Investors were hoping 2016 would be a fresh start after the U.S. stock market sputtered to wrap up 2015. Instead, what they got was rotten.

Major averages kicked off the year with their worst week in more than four years as investors fled the market, and fear is on the rise that a full-blown bear market may be lurking. While that may be overstated, markets do face an unsightly assortment of obstacles. Here are some of the biggest worries on investors' minds, and some factors that may mitigate the downside risk:

CHINA: The volatility surrounding the world's second-largest economy is a primary concern of investors. Attempts by officials there to tamp the selling in equities and the steady devaluation of the yuan have fed worries about capital flight. Moreover, a weakening in the currency could hurt demand for imports, particularly those sold in dollars like oil.

U.S. exposure to China in terms of gross domestic product is minimal - only about 0.7 percent of overall GDP, according to Citigroup strategists - but the knock-on effect for other emerging economies cannot be ignored. Furthermore, Citigroup notes that companies with more than 20 percent of revenues from China, including Apple (AAPL.O: Quote), DuPont (DD.N: Quote), Texas Instruments (TXN.O: Quote) and 30 others, have performed worse than the overall market since the middle of 2015.

THE BULLISH CASE: China's weakened demand cuts the cost of consumer goods and petroleum, and data on driving shows U.S. consumers are spending their savings on gasoline by driving more and spending on entertainment.

INVESTOR SENTIMENT: U.S. stock funds saw their worst week since September as investors pulled more than $12 billion out of equity funds, according to Lipper data. Every sector is down this year.   Continued...

Traders work on the floor of the New York Stock Exchange January 8, 2016. REUTERS/Brendan McDermid