Mirror On The Wall, Where Is The U.S. Looking?

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In the midst of the economic downturn , when the global stock markets were declining at a sustained pace, it was the Chinese economy and its stock market that gave investors a glimmer of hope that, at some point in time, things would improve.

Investors saw a ray of light in the Chinese stock market as it almost doubled its value in 2009, a time in which the more mature stock markets only advanced just a few basis points. Moreover, the Chinese stock market found a bottom in November 2008, at a time when the declines in the S&P index were only starting. During the S&P 500’s downturn (the famous November-March period), there were frequent news reports communicating that the market was likely to turn around as investors were relying on China to secure the global demand. As history has recently shown, the S&P 500 did eventually turn around, more or less helped by the Chinese stock market. 

Everything was working fine in China until August began, when economists/analysts started questioning the numbers coming out of the Chinese economy, which defied the global business cycle. In addition, the strong rally seen throughout 2009, the Shanghai stock market gave the impression that it was quickly becoming the most expensive market in the world, even more expensive than some more mature markets during the pre-credit crisis era. This in turn put an extreme amount of pressure on the regional indexes; quickly triggering panic selling in the Chinese stock market and falling nearly 20% from the high reached at the beginning of August, sending it into bear territory. 

The big question that is on everyone’s mind now is if the selling going on in the Chinese stock market will drag the rest of the financial market with it? Speaking from a macroeconomic point of view, the size of the Chinese economy in the global flow of orders can do this, but as an investor, it is hard to imagine that the selling going on in an emerging economy can affect the S&P 500 for a prolonged period of time, especially after the strong corporate earnings season that was just experienced. Looking ahead, the S&P futures is likely to undergo a retracement period, but in the medium term, the outlook clearly lies to the upside. Barring any other major interventions in the market, the S&P futures is likely to retest the high of the current year, the 1015.00 area.

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