China’s Woes Unnerve an Expensive U.S. Market


The continuing Chinese market turmoil is hurting U.S. stocks for two reasons.

First is the risk that China’s shaky economy will slow growth in Europe and Latin America, hurting the big multinational companies that dominate U.S. stock indexes. Second is the fact that U.S. stocks have been looking expensive and unstable for more than a year, so they were ripe for a pullback.

The Dow industrials last hit a high in May of 2015, eight months ago. Since then, smaller stocks and those in troubled sectors such as energy and commodity production have been falling behind, leaving fewer stocks to keep pushing indexes higher. The bull market has been running for nearly seven years and it is getting old. Meanwhile, the weak global economy is holding back earnings at multinationals, further clouding the U.S. outlook.

“Our investment outlook for 2016 calls for heightened volatility, given the large number of loose ends and wild cards that could influence market behavior,” said Robert Landry,portfolio manager at USAA Investment Solutions, in a report to clients.

The Dow, recently down 1% at 16731, is down 4% this year. If it closes at that level, it would be the worst start to a New Year since 1991, when it fell 4.2% over the first four trading days. In the epic 2008 downturn, the Dow’s decline over the first four days was 3.3%.

For all their troubles, however, U.S. stocks haven’t fallen into a bear market, defined as a decline of 20% or more. The big reason is that the domestic economy has been steadily improving. Weekly jobless claims announced Thursday were moderate and economists hope Friday’s report on December job growth will show continuing gains. Wages are rising. U.S. auto sales hit a record last year for the first time in 15 years. Auto-industry analysts are forecasting another record this year.

Few economists see signs of a recession. The biggest stock declines in the past have occurred at times of recession, such as the bear markets of 2000-2002 and 2007-2009. Bear markets do happen outside times of recession, but they are generally shallower and shorter-lived, lasting only a matter of months.

The big worry right now is that offshore events could harm U.S. markets further. AsChina’s economy has grown larger and more complex, its pace of growth has slowed, and with that slowdown has come pain. The manufacturing part of China’s economy has been in decline for the past 10 months, based on surveys of major manufacturing companies. The International Monetary Fund forecasts 6.3% growth for China this year, down from more than 10% in 2010. China’ economy is opaque and government-dominated, and some economists say forecasts could be too optimistic.

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