China’s President Xi Jinping is visiting the US this week (why are he and the Pope here in the same week??) and he has done his best to put a happy face on his nation’s recent economic decline. He stuck to the official line that China’s GDP is still at a very solid 7% growth rate for 2015. But more and more forecasters are questioning that rather nebulous estimate.
And for good reason. As my readers know, China’s supercharged economy over the last couple of decades has been built largely on manufacturing and exports (“Made In China”), which have been declining since 2011. Here’s a chart which vividly illustrates that decline.
Specifically, the country’s Purchasing Managers Index, a key manufacturing indicator, sank to 47.0 in September from 47.3 in August. Not only did it miss the average forecast of 47.5, but it was also the worst since March 2009 at the depths of the Great Recession.
The report also showed that new orders are falling, output is falling, employment is falling, and prices are falling. Pretty much an across the board slump, any way you slice it. As you can see in the chart, there is no sign of a rebound. China may not be headed for a recession, but the numbers are bad.
The Chinese government is attempting to transform its manufacturing/export economy into a consumer-driven services economy, but such a makeover takes years. In the meantime, the communist government is struggling with the transition both in terms of money (ie – debt) and maintaining its iron grip on its population.
The latest troubles with China’s economy have not gone unnoticed by its formerly high-flying stock markets. The Shanghai Composite Index, the largest stock market in China, was battered this summer. The Index, which soared by 150% since late last year, has plunged by over 40% just since June, and the rout may not be over yet.
Reports last month were that over $800 billion had gushed out of Chinese equity markets this year alone. Some are suggesting that number could go over $1 trillion by the end of this year. This probably explains why the Chinese government has been unloading its holdings of US Treasury securities, reportedly to the tune of over $180 billion this year, as of August.
Clearly, China’s growing economic problems and the plunge in its stock markets have bled over into US and global equity markets. The S&P 500 Index fell more than 10% in August for the first time since 2011.
Not surprisingly, most technical market analysts have turned bearish in their outlooks for US stocks. Perhaps more importantly, most analysts in general (technical, fundamental and momentum) believe that if the August lows in the S&P 500 are violated, we could see a huge move down in stocks. With the market not far above that level, it could happen quickly. In that case, buckle your seatbelts!
To the surprise of just about everyone, US stocks moved lower after last Thursday’s announcement by the Fed that it would leave short-term rates near zero yet again. After all, we’ve been told for years that the Fed’s QE program, the buying of trillions of dollars in US Treasury and mortgage securities, was the main driver of the bull market in stocks.
So why then would the Fed’s decision to keep the zero interest rate policy (ZIRP) in place for at least a few more months, if not until sometime next year, send stocks lower? Maybe it’s because most stock market players now know that the Fed’s massive QE program didn’t work. Just my opinion.
Yet as always, while the bearish case is growing for US equities, we are not without any bulls. On Monday, investment banking giant Goldman Sachs issued a new forecast that predicts the S&P 500 Index will climb back to 2,100 by the end of this year. The report suggests that even though the market’s initial reaction to the Fed’s decision was negative, the ultimate reaction will turn out to be positive. We’ll see.
While Goldman is bullish over the remainder of this year, its report was not without caveats. The report warned that stock-picking could be difficult in the months ahead. “Elevated uncertainty makes stock-picking more challenging, as equity correlations stay high and return dispersion remains low.” That’s Wall Street gobbledygook for… we could be wrong.
Who knows? What else is new?
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