Last summer, problems with the Chinese stock market, economy and currency caused ripple effects all over the globe. As a result, U.S. stock markets fell dramatically in August and September, recovered with a stunning one-month gain in October, then pulled back a bit.
We are seeing literally the same situation play out again this week:
- More problems in the Chinese stock market,
- Ongoing weakness in the Chinese economy,
- Additional devaluations of the yuan,
- And U.S. stock markets reacting by falling.
There’s a variety of information I’d like to share, but what I want to emphasize today is this: U.S. markets are reacting to China, as they would react to natural disasters, war and other extraneous events. A reaction is not nearly equivalent to a causal situation. There is no inherent problem with U.S. stocks. They’re not overvalued. The stock market’s not overextended.
This is simply a case of the tail wagging the dog: the tail being China, and the dog being the U.S. stock market.
As a stock investor, you are being tested. You’re being asked to push your emotions aside, and take the time to think things through. Some of you are feeling a little panicky. My Lord, will my account value go back up? Should I bail? Should I wait to break even, then sell? But where would I put my money? Fixed income rates are still terrible; I’ll never outpace inflation!
Some of you are excited about buying low. Nice. I would caution you to slow down and think that through. Buy low on blue chip stocks with big dividends? That could be wise. Big dividends are the gift that’s brought to your door, every time the stock market has a correction. Check out some of the big dividend stocks in the Smart Investing portfolios, such as General Motors (GM), Federated Investors (FII) and GameStop (GME).
Buy low on energy stocks? Pardon my French, but “Hell no!” I’ve covered this topic repeatedly. It is not wise to buy low with stocks that are having prolonged problems. Truly, just wait until (a) the problems are history, (b) the stock prices not only stop falling, but spend several months stabilizing, (c) earnings are projected to rise annually, and (d) price/earnings ratios are low in comparison to earnings growth rates.
That’s a little intense, sure, but all of those steps screen out risk. Are you enjoying the risk that China’s brought to your doorstep this week? I think not. Therefore, there’s no reason to take on additional risk by jumping the gun on energy stocks, which are, today, unstable investments.
What’s Really Happening in China?
I was visiting my chiropractor* this week, Dr. R., and he asked me about China. Background: he does not know that I’m a stock market expert. He knows me from politics, and that I lobby on trade; so he assumes I might know a bit about what’s happening in China.
I told Dr. R. about the multi-year slowdown in the Chinese economy. He kept insisting that business is booming in China, and he kept referring to “all the crap” that they export to America. (Yeah, pardon the French, again.) He was barely willing to believe that their economy is suffering, and that their problems led to currency devaluations and falling global commodity prices. I honestly didn’t know what to make of his unwillingness to believe the truth. But then again, I’m very political, so I encounter this phenomenon every day.
Okay here’s some truth...
The Shanghai Stock Exchange
Let’s take a look at the Chinese stock market, using the Shanghai Stock Exchange Composite Index (SSEC) as our measuring tool. Knowledge is power, and if you learn more about what’s happened there, you might relax a bit.
Here’s a chart of the SSEC over the last two years. Do you see the big stock market run-up in late 2014? And then another huge stock market run-up in 2015?
The SSEC closed at 2,064.02 on July 8, 2014. The SSEC finished 2014 at 3,234.68 (December 31, 2014), representing a 56.7% gain in six months. Wow! I’m sure investors were thrilled!
But wait ... there’s more! The SSEC rested briefly, then took off again in March 2015, peaking at the June 12th closing price of 5166.35.
That means that after rising 56.7% during the second half of 2014, the Shanghai Composite rose another 59.7% in 2015 through June 12th. And if you’re measuring that gain from July 8, 2014, the Shanghai Composite rose as much as 150.3% in about eleven months.
That’s not investing, folks. That’s gambling.
The Chinese stock market is doing the same thing that all stock markets do after they’ve run up a ridiculous amount: it’s correcting. And big overblown stock run-ups--like we saw in U.S. tech stocks in the late 1990s--lead to big overblown price corrections.
The takeaway from what we’ve witnessed in the Chinese stock market is that just because another country has a concept similar to America--they have food, they have welfare, they have religion--doesn’t mean that those concepts operate anywhere close to the similar concepts in America. The Chinese stock market is far, far more gambling-oriented than the U.S. stock market. It was inevitable that it would fall dramatically.
As for the Chinese economy and the devaluation of the yuan, I covered that in the October 6 issue of Smart Investing in Turbulent Times. Look under the headline How to Dodge China’s Economic Problems in Your Stock Portfolios. Click here to read the October issue.
At this point in time, China is experiencing the same problems that I outlined in October. Their economic weakness has been escalating for at least five years, and China is famous for currency manipulation. There’s nothing new here.
I’m going to continue buying low in the U.S. stock market. The S&P seems to be bouncing at the same support level that it’s repeatedly visited since July 2014. That calms me, because that’s a predictable chart pattern. I’m all about fundamental balance sheet criteria and chart patterns.
I’ve been investing in stocks since 1988. I’m not worried. I hope that I’ve been able to ease your mind today over stock market concerns.
Now I will phone my Dad, because he’s going to want to hear from me, too. Here’s what he wrote in my Christmas card, referring to the most recent China-induced stock market correction, “Market seems to be rebuilding. Thanks for your advice!”
My Dad is a Pulitzer-prize winning journalist; but we cannot all be experts at everything. I know that you are very talented in several areas of life. Please allow me to be a resource for you regarding U.S. stock markets and the economy.
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* Here’s my car accident story ... because it’s amusing. I live on the edge of suburbia. A 40-minute drive will put me in the center of the nearest big city. A five-minute drive puts me square in the middle of deer, coyotes, elk, owls, etc.
I was taking a back road as a shortcut back from a nearby town when I encountered a flock of turkeys crossing the road--about 20 of them! So I stopped. The vehicle behind me did not see the turkeys, and did not stop in time. Yeah, that was pleasant. Thus, the chiropractor visits.
Anyway, the turkeys all crossed safely. Hurray!
Thank you for letting me help you safely navigate U.S. stock markets.