Thursday, December 13th, 2012
By Michael Lombardi, MBA for Profit Confidential
With leadership changing hands in China, many believe the Chinese economy will see robust growth in the upcoming years. I believe the opposite, for reasons I explain below?reasons that are important to Americans. I think the Chinese economy is facing an economic slowdown that will get worse before it gets better.
Currently, growth prospects for the global economy (which China is very dependent on, as it is a country rich in exports) are dismal, as major world economies face hardships. In fact, a global recession is more likely than an economic recovery.
The effects of a slowing global economy are creeping into the Chinese economy. Chinese exports fell 2.9% in November due to headwinds from the global economy, with the eurozone and Japan in recession and the U.S. economy in a questionable economic recovery. (Source: Reuters, December 10, 2012.)
Exports from the Chinese economy to the European Union have fallen for six consecutive months; they fell another 18% in November 2012 compared to November 2011. The European Union is China?s biggest trading partner.
To give you some perspective on China?s reliance on other countries for its own growth, in 2011, the Chinese economy?s exports accounted for 31% of its gross domestic product (GDP).
Weak world economic growth equals weak economic growth for the Chinese economy, as the country is on track to reporting its lowest GDP growth in about 20 years in 2013. According to Fitch Ratings, the economic slowdown in the Chinese economy will continue further into next year. The agency expects China?s real GDP to grow five percent in 2013 and 6.5% in 2014. (Source: Fitch Ratings, December 5, 2012.)
Similarly, as its economy deteriorates, Chinese companies are seeing their profits decline. This year, Fitch Ratings expects the earnings of the Chinese companies it follows to grow by only 0.1%, compared to 10% growth in 2011. (Source: China Daily, December 10, 2012.)
Despite the leadership changing in China, the Chinese economy is set for some rough economic conditions ahead. The main culprit for this is the world economic slowdown. Dear reader, China is extremely dependent on its exports, as they account for one-third of its annual GDP. With the U.S. economy only expected to post mediocre growth in 2013 and with the eurozone going back into recession, China will not see the robust growth some suggest.
As the economic slowdown in the Chinese economy continues, you can certainly expect the stock market here in the U.S. economy to come under pressure. Why? Many companies in the S&P 500 do business in China. As the economic slowdown deepens, demand will fall from Chinese consumers, and this eventually will lead to lower sales and poor earnings for the many American companies doing business in China.
Michael?s Personal Notes:
After a drop of almost nine percent in the S&P 500 from mid-September to mid-November 2012, the recent stock market bounce has some stock advisors convinced we are going higher with stock prices.
On the contrary, as I have been saying in these pages, there are not a lot of reasons to be bullish on stocks. The S&P 500 is currently standing on the edge of a cliff, and it won?t be too long until it falls.
Looking from the fundamental and technical analysis points of view, the S&P 500 doesn?t have a lot of room on the upside. The recent stock market bounce on the S&P 500of about six percent from the lows of mid-November might just be another mini sucker?s rally.
Technical analysis involves using chart patterns and indicators to predict future stock prices. Currently, the S&P 500 is trading at levels that could be the turning point, with the stock market poised to head downward.
According to a tool commonly used in technical analysis called the Fibonacci retracement, the S&P 500 is trading at a key level?61.8% retracement.
Fibonacci retracement is used in technical analysis to identify possible stock market support and resistance levels?price retrenchments of 38.2%, 50.0%, and 61.8% are considered to be the levels where prices find support or resistance depending on the move.
S&P 500 Large Cap Index Chart
Chart courtesy of www.StockCharts.com
After the significant move to the downside, the S&P 500 rose from the low of 1,343.35 on November 16 to as high as 1,423.73 on December 3. Since then, the index hasn?t been able to break those highs?this is also where the 61.8% retracement level sits. (Look at the chart above to get a better idea.)
At the same time, as the stock market bounce continued, trading volume decreased. This suggests the participation was much lower?a major negative.
Looking at the stock market from a fundamental point of view, nothing has changed. As a matter of fact, the conditions have gotten worse.
The global economy shows signs of deterioration, with the eurozone crisis deepening after stronger nations like Germany slashed their growth outlook. Furthermore, Japan is still facing recession; the U.S. economy is struggling to find economic growth; and the Chinese economy will grow in 2013 at its slowest pace in about 20 years.
The majority of the companies in the S&P 500 have reported their corporate earnings for the third quarter of 2012, and sadly, they are on track for the first quarter of negative growth in 11 quarters. (Source: FactSet, November 26, 2012.)
The recent stock market bounce may be a persuasive move to some, but it hasn?t impressed me at all. Technical analysis and the fundamental data do not support the recent increase in the S&P 500?s value. Key stock indices, including the S&P 500, have risen ahead of themselves. A market sell-off is more likely than a stock market rally as the usual Christmas rally comes to an end.
Where the Market Stands; Where It?s Headed:
We are near the end of a multi-year bear market rally in stocks. I believe 2013 will prove to be a very difficult year for the stock market.
What He Said:
?For the economy, the message from retail stocks is quite clear: Consumer spending, which accounts for roughly 70% of U.S. GDP, is in jeopardy. After having spent like ?drunkards? during the real estate boom years, consumer spending is taking the same trend as housing prices, slowing down faster than most analysts and economists had predicted. As news of the recession continues to make headlines in the popular media, the psychological spending mood of consumers will continue to deteriorate, lowering earnings at most high-end retailers and bringing their stock prices down even further.? Michael Lombardi in Profit Confidential, January 28, 2008. According to the Dow Jones Retail Index, retail stocks fell 39% from January 2008 through November 2008.
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