July 29--The bull market remains intact after making its way out of the China shop ... at least for now.
Yet while the U.S. stock market found its footing Tuesday after being whacked by China's shocking stock market plunge Monday, concerns over the fragility of China remain. And neither the U.S. nor the globe's economies are insulated from the broken trends China has set in motion in the world.
Although some analysts want investors to view China's near 50 percent stock market plunge independently from the country's economy, China has clearly lost some of its strength and isn't likely to drive a bull market the way it has over the last few years. Since the U.S. financial crisis in 2008, China has been the powerhouse of the global economy.
Now, however, the data show China losing its muscle.
"For the first half of 2015, China's industrial sales rose by merely 1.4 percent year over year ... the worst first-half showing since the 0.4 percent annual uptick in the first half of 2009," said John Lonski, Moody's analytics economist.
That's a rather disconcerting comparison. Recall what was happening in early 2009. The U.S. was in the worst recession since the Great Depression and as American consumers stopped buying, troubles in the U.S. spread to the world. China fought back to avoid being sucked into a downward spiral. It poured tremendous stimulus into its economy and drove massive spending on everything from home construction to infrastructure building and manufacturing. China enjoyed a growth spurt and the world benefited, especially emerging markets selling the commodities China needed to build buildings and manufacture products.
But with massive debt now, China's been cutting back and its growth is slowing -- leaving questions about what country in the world can possibly fill the growth void of a burly China. After all, Europe is not particularly strong and continues to deal with debt issues; the U.S. is growing but at a pace slower than usual.
Since 2000, China has given the globe 27 percent of its growth, notes economist Andrew Labelle of TD Economics. The U.S. and Europe combined provided just 16 percent.
Some analysts claim China continues to grow at about 6.5 percent, but others doubt it. Marc Faber, Asia-based analyst and publisher of the Gloom, Boom and Doom Report, estimates China's growth at no more than 3 percent.
The impact of China's slowing growth can be seen in many forms: Stock markets in emerging markets have been falling hard. Citigroup's Andrew Howell called it "doom and gloom" in a note to clients. Emerging market countries that provided basic materials -- like copper and nickel -- to China, are hurting. As China has cut back on its building and manufacturing boom, metal prices have fallen 27 percent during the last 12 months, notes Moody's Lonski.
"Spillovers from China's slowdown and structural changes will remain a dominant theme for Asia," said Citigroup's Johanna Chua.
The U.S. is affected too. Companies throughout the world have the capacity and the need to produce more products than customers want. So as they churn the products out, businesses have lost their ability to charge customers what they need to generate strong profits.
There has been "a significant loss of business pricing power," Lonski said. The impact shows up in the lethargic sales numbers that U.S. companies are now reporting for the second quarter. Prices have dropped sharply this year, and consequently the sales growth of large U.S. companies is "barely up 0.1 percent," he said.
Investors in industrial companies have felt the pain. With sales to potential customers disappointing, industrial stock prices have also plunged. Bespoke Investment Group noted: "Industrial firms are getting their clocks cleaned due to the collapsing prices of their output."
"For commodity producers, lenders to the firms that mine and ship and store, and even for whole countries, the horizon is indeed looking quite bleak," Bespoke said in a report to its clients.
Of course, not every sector is feeling the China drag.
The U.S. consumer remains OK, and companies that sell to them are doing well. "Amazon, Starbucks and Under Armour have been rewarded handsomely," noted Bespoke.
But with energy, material and industrial stocks doing poorly, this is what technical analysts call a "narrow market," with too few companies doing well. That can be a warning sign for an impending stock market correction, or downturn of about 10 percent.
The Dow Jones industrial average reflects the jittery sense of investors. This year the stock market index has gone back and forth between achieving positive gains for the year and then losing them 21 times. On Tuesday, the Dow closed at 17,630, below where it began the year at 17,832.
gmarksjarvis@tribpub.com
