Be patient for attractive entry points in this market sell-off

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Volatility has returned to the markets with a vengeance today, with global growth concerns resurfacing front and center.

Equity markets around the world are under pressure on this first trading day of a new year, triggered by another negative economic report out of China over the weekend that sparked a Chinese stock market selloff. Chinese December Caixin Manufacturing Purchasing Managers' Index (PMI) came in below expectations at 48.2, falling short of the Street's forecast of 48.9 and the previous month's reading of 48.6. This is the tenth consecutive month that the manufacturing PMI index has come in below 50, reflecting continued contraction in Chinese manufacturing activity. The reading has resurfaced concerns about decelerating economic conditions in the nation, and has raised fresh skepticism about whether or not the People's Bank of China measures can stabilize the Chinese economy.

In overnight trading in China, circuit breakers that just went into effect today were triggered and halted trading. The Shanghai composite index lost 6.9 per cent, and the Shenzhen composite plunged 8.2 per cent. In Hong Kong, the Hang Seng closed down by 2.7 per cent. The weakness in the Pacific Rim has spilled over into European and North American markets.

Here in North America, the S&P/TSX composite index at 12 p.m. (ET) was down 179.4 points, or 1.38 per cent, at 12,830.58, while the Dow Jones industrial average was down 421.9 points, or 2.42 per cent, at 17,003.1. The S&P 500 was down 46.89 points, or 2.29 per cent, at 1,997.05. On a technical basis, 2,000 is a key level to watch for the S&P 500, to see if the index can hold above this level.

So what does this global meltdown mean for investors in Canada? The direction of markets in January often does set the tone for the rest of the year. Market direction in January correctly forecasts whether markets end up or down for the year as a whole 72.4 per cent of the time. But the same can not be said for opening day performance, with the market moving in the same direction for the year 50.6 per cent of the time.

Pressure may remain in the markets in the days ahead, and buyers may remain on the sidelines in the near-term awaiting the Federal Open Market Committee minutes, which will be released on Wednesday, U.S. non-farm payroll data on Friday, and Chinese trade data that is due out later this week.

On a valuation basis, the S&P 500 index is trading at a price-to-earnings multiple of 17 times the 2016 consensus estimate, above its historical three and five-year averages of 16 times and 15 times, respectively. The S&P/TSX composite index is also trading at a slight premium to its historical averages, suggesting there is room for multiple contraction.

Next week, on Monday, Jan. 11, the U.S. fourth-quarter earnings season kicks off. According to Thomson Reuters, 129 companies in the S&P 500 index have issued guidance for the fourth-quarter, 89 companies have issued negative earnings guidance, or 69 per cent of companies. This is an improvement from the same time last year when 77 per cent of companies issued negative earnings guidance, and last quarter with 71 per cent of companies issuing negative guidance.

We remain in a stock pickers market with no dominant sector leadership. In 2015, the top ten performers were from seven different sectors. In addition, only two sectors delivered positive price returns, the technology sector and consumer staples sector. These sectors were also the top two performing sectors in 2014 . However, within the sectors, outperformance is very selective. Within the information technology sector, only seven of the 13 members realized positive returns for the year. The consumer staples sector fared better with seven of the 10 members delivering positive returns. The largest sector in the S&P/TSX composite index, Financials, had only 19 of the 46 members achieved positive returns.

The bottom line: Wait for key data due out later this week, and be patient for more attractive entry points that may emerge in the days ahead for selective, fundamentally solid companies.