The New Year has begun with a broad-based selloff in global equities. China’s stock market posted heavy losses this week, causing trading activity on the Chinese exchange to be halted two of the past four trading days and spilling over into selloffs in the U.S. markets as well. The stock market declines came on the heels of a further devaluing of the yuan by China’s central bank in an effort to boost exports, which renewed fears about the slowing Chinese economy. Energy markets unsurprisingly also reacted negatively to the turmoil in China, leading oil prices to decline to their lowest levels in more than a decade. A few key points to bear in mind as we weather these events:
1. Investors have been aware of slowing economic conditions in China for some time, and this story is still playing out. As Chinese authorities continue to navigate the careful transition from an export- to a consumer-driven economy, there will be many further opportunities for close scrutiny. However, for the near future, the Chinese economy is still expanding at a rate that most analysts believe to be somewhere between 5-6% (compared to 1-2% growth in the developed world). We do not see this as cause for panic. The headlines about the Chinese stock market have been dramatic to say the least, but remember that this market is comprised mostly of local investors that are new to stock ownership and are very sensitive to price swings, which has exacerbated the volatility.
2. Economic data in the U.S. continues to show fundamental strength. Weekly jobless claims released as recently as yesterday point to steady demand for labor, and retail sales continue to show strength as lower energy prices provide a boost to consumers. This recent data continues to support the positive fundamental picture that the Federal Reserve noted when they chose to raise interest rates in December for the first time since the financial crisis, and points to further support for equities. We do not see indications of a recession on the horizon.
