The Chinese economy is weakening and the U.S. market falls. Why is that? Seeing that U.S. stocks had their worst day in five years we have to ask how far will a weak Chinese economy drive U.S. stocks down. There is more than one reason why U.S. stocks fell so let us look there first. CTV News looks at 5 reasons U.S. investors are dumping stocks.
For years, investors in U.S. stocks shrugged off threats — a government shutdown, fear of a euro collapse, a near U.S. debt default — and just kept on buying. At the sixth anniversary of the bull market in March, the Standard and Poor’s 500 index had more than tripled in value.
Now, buyers are hard to find. A wave of selling has hammered major indexes, with the S&P 500 losing nearly 6 per cent in the past week. That is its worst weekly slump since 2011, and leaves it close to what Wall Street calls a “correction,” or a fall of 10 per cent from a recent high.
- Fears about a slowing Chinese economy top the list because when the second largest national economy in the world slows down so do orders for raw materials from the developing work and high tech orders from North America, Europe, Japan, Singapore etc.
- Oil prices are their lowest since the start of the Great Recession. This is good for your gas tank but bad for the market.
- Profits are off in many sectors which is a result of slowing domestic and global growth and ties directly into slowing growth in Asia.
- Technical analysis tells technical traders that it is time to sell. This can be temporary but a cause for a market correction.
- The Fed was supposed to be raising interest rates in September 2015 for the first time since before the 2008 market crash. If they go ahead and do so stocks will take a hit. Many investors are looking at the big picture including interest rates and deciding that holding cash is a better deal now than stocks.
How Bad Will It Get?
The intrinsic value of an investment is based on expected return on investment discounted to current investment value. How far will a weak Chinese economy drive U.S. stocks down? Look at Apple taking a 6% hit due to expected weak sales in China and multiply that by John Deer, IBM, Intel, etc. Then make the assumption that things will get worse in China because the non-transparent Chinese economy is worse that they have been letting on, bad loans and all. CNN Money asks how bad is it. There is a case for 2% to 5% growth versus the officially reported 7%. CNN Money quotes an independent Chinese economist.
He has heard that in Beijing, they are privately talking about 2% growth.
Across the board, the statistics don’t look good with everything from steel to rail freight to electricity consumption showing big drops. China’s manufacturing sector looks especially weak – sentiment just hit its lowest level in six years.
“There’s a lot there that looks really wrong,” he says.
He is concerned that a lot of the growth is coming from people, companies, real estate developers and even local governments taking on more debt. “The growth they are creating is crap growth. They’re aggravating their debt problem and they have no solution.” He estimates the true GDP number is likely 1% to 2% growth. Expect China to hurt American company earnings for the rest of the year. Even worse, expect more panic “because people think that China is more important than it actually is.
The last part of this analysis is probably the most important when you ask how far will a weak Chinese economy drive US stocks down. Intrinsic analysis requires an estimate of future return on investment. When investors and traders panic they anticipate worse conditions than what will really happen. If you agree with analysis expect an overreaction to the weak Chinese economy lasting at least a year and then opportunities for bargain shopping on the back end.
Be The First To Comment
Related Post
Please Leave Your Comments Below