China’s Seven-Year Itch

June
22

Written by: Jon McGraw

ChinaYou’re probably familiar with the seven-year itch. Not the movie with Marilyn Monroe, but the concept that relationships can lose their luster after seven years.

That may be what happened last week in China. Investors got itchy and the Chinese stock market suffered its worst week since 2008. The Shanghai Composite lost more than 13 percent during the week, and the Shenzhen Composite was down 12.7 percent, according to MarketWatch. The previous Friday, the Shenzhen had closed at a record high.

Prior to last week’s correction, China’s stock markets had been VERY popular. So popular, Chinese firms were seeking to delist from American stock exchanges and relist their shares on Chinese exchanges, reported The Economist. Plus, the Chinese government rolled out the red carpet (and waived profitability requirements) for new firms seeking to list on local stock exchanges.

In their enthusiasm to participate in rising markets, some Chinese companies are reinventing themselves on paper. The Economist wrote:

“But the wider trend is clear. At least 80 listed Chinese firms changed names in the first five months of this year. A hotel group rebranded itself as a high-speed rail company, a fireworks maker as a peer-to-peer lender, and a ceramics specialist as a clean-energy group. Their reinventions as high-tech companies appear to have less to do with the gradual rebalancing of China’s economy than with the mania sweeping its stock market. The Shenzhen Composite Index, which is full of tech companies, has nearly tripled over the past year.”

June has been a tough month for China. Earlier in the month, MSCI decided not to add China’s A-shares, which are denominated in China’s renminbi, to its emerging markets index because of issues related to Chinese markets’ accessibility.

Greece hasn’t been faring all that well either. The European Central Bank extended an emergency $2 billion loan to the Greek government. The Greek people, anticipating Greece may not reach an agreement with its creditors, which could trigger default and an exit from the euro, withdrew more than $1 billion from the country’s banking system in one day.

Data as of 6/19/15 1-Week Y-T-D 1-Year 3-Year 5-Year 10-Year
Standard & Poor’s 500 (Domestic Stocks) 0.8% 2.5% 7.7% 15.8% 13.6% 5.7%
Dow Jones Global ex-U.S. -0.4 5.0 -5.3 8.4 4.5 3.3
10-year Treasury Note (Yield Only) 2.3 NA 2.6 1.6 3.2 4.1
Gold (per ounce) 1.7 0.4 -6.9 -9.5 -0.8 11.1
Bloomberg Commodity Index -0.7 -4.3 -26.7 -8.8 -4.9 -4.7
DJ Equity All REIT Total Return Index 1.7 -1.8 8.7 11.2 13.1 7.4

Ip! Ip! Ooray!

Greg Ip, Chief Economics Commentator at The Wall Street Journal, was blogging about business cycles. He wrote, “After a perplexing start to the year, the economy is starting to make sense … [Recently released data] has begun to help solve three puzzles that have hung over the U.S. and global economies in the last year.” The three puzzles were:

  1. There was no surge in consumer spending in the United States. Despite a mammoth drop in oil prices, retail sales were weak and contributed relatively little to first-quarter growth. However, May retail sales numbers were strong, and numbers for March and April were revised upward. So, consumers appear to be spending. (The final revision to gross domestic product (GDP), which was released in late May, showed GDP grew by 0.2 percent during first quarter.)
  1. When workers are in short supply, wages should rise—but they haven’t. Unemployment is at about 5.5 percent. Employers have jobs open and are seeking qualified applicants. Yet, hourly earnings had barely improved at all. The Bureau of Labor Statistics’ Employment Cost Index showed private workers’ compensation grew 2.8 percent for the 12-month period ending March 31, 2015. That was a big improvement over the previous year’s growth. Government workers realized a 2.1 percent increase for the same time period, which was a modest improvement over the previous year.
  1. The bond market hadn’t priced in a rate increase. Federal Reserve guidance has been pretty clear. When employment and inflation numbers align, the Fed will begin to tighten monetary conditions by raising the Fed funds rate. Regardless, bond market rates hadn’t moved higher—until recently. Yields on 10-year Treasuries rose from 1.87 percent in early April to about 2.4 percent by mid-June.

Ip summarized, “… in many ways, the world is behaving as it should. If so, then the next stage is for stock and bond investors to finally realize the era of zero rates is coming to an end and re-price accordingly. Do not expect that to be a smooth process … That the world is behaving normally, however, is not the same as saying it’s back to normal.”

Weekly Fun—Think About It

“Change is the law of life. And those who look only to the past or present are certain to miss the future.”

—John F. Kennedy, 35th President of the United States