Stock markets, bull runs and crashes. Losses, China, and corporate earnings. Any financial conversation going on right seems to be peppered with these buzzwords.
Everyone seems to be collectively holding their breath, waiting and watching for what’s coming next. Is China’s terrifying crash headed west? Are the two markets even related? We have seen stock markets all over the globe run the gamut. From incredible jumps and equally terrible drops, with China reporting the lion’s share of the losses (a whopping 40% plummet in 10 weeks). Let’s dig a little deeper into some of these terrible headlines and see if everyone is crying wolf or if we really need to start to worrying.
The long and short of it – things don’t really look that bad. Especially when we dive a little deeper on these hot topics plastering the headlines.
Explaining China’s Stock Market Fall
As the rest of the world looks on, China’s stock market has been on a steady downward spiral for over two months. The Shanghai Composite has plunged more than 40% from its mid-June peak, with the Shenzhen composite experiencing even greater losses.
When put into context however, these tremendous losses don’t look quite so tremendous. This plummet is trailing a long bull run, or a sustained rise in share prices. Even after this 10 week fallout the Shanghai composite is still up 35% when compared to this time last year, with the Shenzhen still holding onto 45% of those gains from the same period. Things look even better when you learn the damage is pretty contained, since only about 1.5% of the Chinese market is owned by foreigners.
Probably the most important part of all – China’s stock markets aren’t an indicator on how their economy is doing overall.
“Investors are overreacting about economic risks in China,” said Mark Williams, Capital Economics chief Asia economist. “The collapse of the equity bubble tells us next to nothing about the state of China’s economy.”
How? A large majority of China’s immense savings are held in property and cash.
So China’s Problems Won’t Bring us Down?
Though some would like you to believe China’s economic slowdown could spread to the rest of the world, it’s actually pretty farfetched. Though China is at the center of the current global stock selloff, it doesn’t leave the U.S. as exposed as we are led to believe. Thanks to a bit of truth from Goldman Sachs we know that only 2% of the revenues from the entire S&P 500 come from China. So if any financial problems are on the horizon, it’s going to be hard to point the finger of blame east.
But Corporate Earnings Are Still Down
Corporate earnings saw a drop recently, there is no arguing fact. Therefore it would be logical to assume American businesses are doing poorly too. But when we look at the causation behind this, things aren’t quite as dire as they appear.
We know Oil prices have taken a pretty sharp dive, currently sitting right around $40 a barrel - a far cry from the $100 barrels from a summer ago. This has obviously caused energy companies to feel the burn, with Exxon and Chevron posting profit losses of over 50 percent from the previous year. For Chevron, it’s the lowest in their 17 years. With Exxon and Chevron dragging down other energy stocks on Wall Street, the S&P 500 energy sector slumped 2.6%, its biggest drop since January. This slump has caused the earnings for the whole S&P 500 to be on pace for a 1.3% decline in year-over-year earnings, which would be the first decline of its kind since 2008. However, when the energy sector is excluded, corporate profits would be up 5.4%, indicating significant increases everywhere else.
So, We’re Going to Be Okay?
On August 26th, the Dow experienced an incredible 619 point rise, the biggest jump the U.S. market has seen since the 2008 downturn. Unemployment in the U.S. fell to 5.3% in July, the lowest levels we’ve seen since April 2008. And finally, the U.S. Economy is growing; we saw a 2.3% increase in the second quarter of 2015 over the previous quarter.
All things considered, things aren’t nearly as bad as they appear on the surface.
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