Chinese Market Regression Is A Far Cry From ‘Collapse’

By: Wayne Duggan

It’s no secret that the major market turbulence that sent the S&P 500 down 11 percent in a matter of days has been driven in large part by fears surrounding the stock market crash in China.

As bad as things have been in the U.S., China’s Shanghai Index recently booked five consecutive days of losses that totaled a combined 22 percent decline.

Scary Numbers

Statistics like this one are spooking traders around the world. For years, China’s strong growth and equally strong stock market have been driving global markets and confidence.

The Shanghai Composite Index is now down about 40 percent since early June, a startling figure. If the S&P 500 were to decline 40 percent from its recent peaks, it would be trading below 1300, a level it hasn’t touched in nearly four years.

Bubble Dynamics

There’s one big difference between the S&P 500 and China’s Shanghai Composite: volatility. The Shanghai Composite’s 40 percent decline has dropped the index from 5178 to below 2900.

When was the last time the Shanghai index was this low?

Many traders might be surprised to learn that China’s market was trading at these levels as recently as December of 2014, less than one year ago!

If most traders heard that the stock market of one of the largest global economies is up nearly 40 percent in the past year, they would be likely be shocked by the strength of that performance.

At the same time, if they learned that the market of another global economic power was down 1.2 percent during that same time, they would likely be turned off.

In fact, while the prevailing opinion seems to be that China’s market woes have been “dragging down” the S&P 500, the chart below shows what’s actually happening.

Shanghai Composite Index Level

Over the past year, the Shanghai index has booked a 40 percent gain, while the S&P 500 is down modestly.

Long-term Perspective

The Chinese market collapse is very real, but it must be kept in perspective. Yes, the Shanghai index has fallen 40 percent in a matter of months, but that is the nature of a bursting bubble. The other half of that picture is the inflation of the bubble.

As of this point, China’s stock market has not fallen off a cliff. It has ridden the ski lift to the top of the mountain and is now sliding back down the slopes to where it started.

Weakness Is Not Collapse

China’s underlying economic numbers paint the same picture: the economy is not collapsing, at least not just yet. China’s Q2 2015 GDP expanded by 7.0 percent year-over-year.

Sure, China’s economic growth may not be exploding like it once was. And yes, there are many people that question the validity of China’s economic numbers.

But even if the 7.0 percent number is on the high side, it’s still a much higher growth rate than the U.S. Q2 GDP growth of 3.2 percent.

China GDP NSA

China’s Problems

China has plenty of economic issues, including a sky-high debt-to-GDP ratio of more than 200 percent. That rate is about twice the current U.S. ratio, and it is an indication that China certainly seems overextended.

However, when discussing China’s market “collapse,” and what it means in terms of history, it’s important to remember that the Shanghai Composite Index could fall another 32 percent from current levels and still be trading within its 2014 trading range.

Opportunity To Buy

Many opportunistic traders have taken advantage of the global panic and been buying the dip. Fears over weak demand from China have weighed heavily on crude oil prices, sending them plummeting to fresh six-year lows in recent days.

Economist Dennis Gartman, publisher of The Gartman Letter, recently indicated that he sees relatively little downside to oil majors from here.

“We may begin a program that hopefully shall last for several years of buying the shares of the truly ‘major’ oil companies such as Exxon Mobil and Anadarko Petroleum amongst others,” Gartman wrote following the market collapse.

Even after the recent pullback, the Energy Sector remains the only sector that is currently priced at a discount to its long-term cyclically-adjusted price to earnings ratio (CAPE).

Traders that believe that fears over China are a bit overdone can scoop up ExxonMobil Corp (NYSE: XOM) and Anadarko Petroleum Corp (NYSE: APC) on China-related market weakness or take advantage of the Energy Select Sector SPDR ETF (NYSE: XLE), which recently traded at three-year lows.

Lime Brokerage LLC is not affiliated with these service providers. Data, information, and material (“content”) is provided for informational and educational purposes only. This content neither is, nor should be construed as an offer, solicitation, or recommendation to buy or sell any securities. Any investment decisions made by the user through the use of such content is solely based on the users independent analysis taking into consideration your financial circumstances, investment objectives, and risk tolerance. Lime Brokerage LLC does not endorse, offer or recommend any of the services provided by any of the above service providers and any service used to execute any trading strategies are solely based on the independent analysis of the user.

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