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Stocks are suddenly in a rut.
New York CNN —
Many investors are running a sizable profit this year – the S&P 500 is about 14% higher in 2023. But market losses have been piling up over the past month, particularly on growing fears of contagion from an economic slowdown in China. Inflation, Russia’s war in Ukraine and weakness in America’s banks also have Wall Street spooked.
The Nasdaq has dropped by 7.7% in August and the S&P 500 is down nearly 5% this month. On Thursday, the Dow closed lower than its 50-day moving average, a key threshold that investors often interpret as a bearish signal. The index is down 3% this month.
The , which looks at seven indicators of market sentiment, is showing signs of fear on Friday for the first time since March. That’s a big change from just one month ago, when the index was in “extreme greed” territory.
So what’s going on?
China’s economy is in trouble
China’s souring economy spells bad news for US stocks, and potentially for your portfolio.
Chinese consumer spending, factory production and investment in long-term assets (such as property, machinery or other goods) all slowed in July, according to the country’s National Bureau of Statistics.
Youth unemployment in the world’s second-largest economy has repeatedly hit record highs. Earlier this week Beijing decided to suspend the release of that monthly data altogether.
And an ongoing real estate and debt crisis has some investors fearing the potential of a “Lehman-like” moment for China.
Tensions between the US and China, meanwhile, have been on the rise as the world’s two largest economies clash over issues ranging from trade policy and technology, to Russia’s invasion of Ukraine.
“For most of the last two decades, China’s economic growth has been a major driver of the global economy,” said Alex Etra, a strategist at data analytics firm Exante. That means that if China’s economy slows down, global economic growth slows down.
“When global economic growth slows down, that tends to be negative US equities. And some of that has to do with direct exposure of US companies’ sales in China and with China being a major consumer of commodities.”
US-based companies doing business in China stand to lose if the economy there continues on a downward trajectory. Companies like Apple (AAPL), Intel (INTC), Ford (F) and Tesla (TSLA) all have large manufacturing ties to the country. Others, like Starbucks (SBUX) and Nike (NKE), rely on Chinese consumers.
Blame the Fed
The Federal Reserve has bumped up interest rates by more than 5 percentage points over the past year and a half to fight soaring inflation.
As recently as a few weeks ago, Wall Street seemed almost certain that the Federal Reserve was just about finished with that rate-hike regimen — which many economists had assumed would plunge the US into recession.
But a string of strong economic data has challenged those notions.
The US economy has been resilient: The Atlanta Fed has estimated a whopping 5.8% annualized third-quarter GDP growth rate, unemployment remains low and consumer spending is strong.
Fed officials are concerned that prices could continue to rise. At their July meeting, they said more interest rate hikes might be necessary soon, according to meeting minutes released this week.
Investors aren’t happy about that. On Thursday, the yield on the US 30-year Treasury bond hit its highest since 2011 and the 10-year note notched its best return since October 2022. Bond yields go up as bond prices fall.
Geopolitical turmoil
Global inflation is finally coming down, but heightened geopolitical tensions threaten to raise food and oil prices across the globe. Russia’s invasion of Ukraine continues to stoke fears of rising commodity prices, global economic instability and uncertainty around security.
Jamie Dimon, CEO of JPMorgan Chase (JPM), has cited the ongoing war as his greatest concern on many occasions. Most recently, he told CNBC two weeks ago that the world is seeing “serious” levels of “nuclear proliferation and nuclear blackmail.” This level of geopolitical chaos, he said, hasn’t been seen since World War Two. “The world’s not that safe.”
Banks are still at risk
Fears of contagion still exist around the regional banking crisis in March: The fund controlled by investor Michael Burry, of “Big Short” fame, sold 150,000 shares of First Republic Bank (FRC) as well as holdings in Huntington Bank, PacWest (PACW) and Western Alliance (WAL) as part of a major realignment in his portfolio that included a $1.6 billion bet against the broader stock market.
Big banks could also be in hot water: Bank shares fell on Monday following reports that Fitch Ratings warned of an additional downgrade of the US banking industry that could affect the ratings of several large American lenders.
The August Doldrums
Another reason for recent turmoil: Few investors are paying attention.
The well-known Wall Street adage says “sell in May and go away” because the summer, and August in particular, marks a historically volatile period for the stock market. That’s largely because so many investors take vacations and there are decreased trading volumes. This reduced activity can lead to increased volatility.
On average, August has been the worst-performing month for stocks since 1986, according to Morningstar.
This August has been busy for late summer. It’s been chock full of economic data and big corporate reports. That means the dwindling number of traders who remain were trying to keep things afloat in a particularly volatile environment.
I'm a financial expert with a deep understanding of the current economic landscape. My knowledge extends beyond the surface, and I can provide insights into the intricate details of the financial markets. Let's dive into the concepts mentioned in the article about the recent turmoil in the stock market.
1. Economic Slowdown in China:
- China's economic troubles, including slowing consumer spending, factory production, and investment, are contributing to the market's concerns.
- Youth unemployment in China has reached record highs, and there are worries about a potential real estate and debt crisis.
2. US-China Relations:
- Tensions between the US and China are escalating, impacting global economic dynamics.
- The article suggests that the growth slowdown in China has broader implications for global economic growth, affecting US equities.
3. Federal Reserve and Interest Rates:
- The Federal Reserve has raised interest rates by more than 5 percentage points over the past year and a half to combat inflation.
- Despite initial expectations that the rate-hike cycle was ending, strong economic data has raised concerns, leading to potential future interest rate hikes.
4. Geopolitical Turmoil:
- Global inflation is decreasing, but geopolitical tensions, particularly Russia's invasion of Ukraine, are causing fears of rising commodity prices and economic instability.
- Jamie Dimon, CEO of JPMorgan Chase, has expressed concerns about the current level of geopolitical chaos, comparing it to World War Two.
5. Banking Sector Risks:
- Fears of contagion from the regional banking crisis in March persist.
- Notable investors, including Michael Burry, have made significant portfolio realignments, signaling concerns about the broader stock market.
6. August Doldrums:
- August historically tends to be a volatile period for the stock market, marked by decreased trading volumes and increased volatility.
- The adage "sell in May and go away" is mentioned, highlighting the historical underperformance of stocks in August.
In summary, the confluence of factors, including China's economic slowdown, geopolitical tensions, potential interest rate hikes, and lingering concerns in the banking sector, has created a turbulent environment for the stock market in August. It's crucial for investors to stay informed and navigate these challenges with a nuanced understanding of the interconnected global economic landscape.