Published September 27, 2024
Stock markets received quite a jolt this week. After years of weak performance and seeming government ambivalence, China shifted gears this week. The world’s number two economy, declining and depressed for years by overbuilding among other ills, shocked markets by announcing a “bazooka” of government stimulus measures. The chart below of the country’s largest companies shows 15 years of “going nowhere” performance. Even this week’s monster rally has yet to move price above where it was fourteen years ago.
The closely related Hong Kong market shows a different trend. After moving higher for almost twenty years (except for the U.S. financial crisis year), the Hong Kong market has spent the post-COVID period in a marked downtrend. Has this week kicked off a new uptrend?
If China can find its way out of the economic hole, the impact on the global economy could be massive. For one, forestalling a possible recession in Europe. And European stocks this week embraced that possibility, as did commodity markets and anything related to sales into China – almost all of which have been increasingly floundering in recent years.
Here’s this week’s “blast” upward on the China news:
This year’s stock market has been driven by shares of the Magnificent Seven and almost entirely a U.S.-market only story. If China’s BIG week carries forward, stocks will have substantially broadened out their rally and received a very large blast of fresh air and new reasons to buy stocks.
Market Update
Following the Fed’s transition last week to an interest rate reduction focus, investors looked this week to whether markets would continue building on last week’s post-Fed rally. The answer was a muted “yes” as stocks largely ran in place this week ekeing out a slim gain despite a number of positive news items.
Friday brought an inflation report that supported the Fed’s large 0.5% interest rate cut last week. The Fed’s preferred personal consumption price index (PCE) showed a 2.2% rise in prices over the prior year – right at the Fed’s goal of 2.0-2.5% “core” inflation. The day prior saw 2nd quarter GDP confirmed at a +3% rate, solid growth for the U.S. economy.
The real fireworks for the week came from an unexpected source when the Chinese government unveiled a flurry of economic stimulus measures Tuesday and Thursday. Investors had given up on the Chinese economy staging any near-term rebound as previous government efforts had been ineffective in turning around a years-long economic slide. The unveiling of the stimulus sent the Chinese stock market to a massive gain with the U.S. listed large-cap China index soaring almost +20% this week. That, in turn, pushed up all overseas market indexes and anything remotely affected by business in China – read: commodities, materials companies, Asia, Europe.
The burst in China markets had relatively little impact on the broad U.S. market, however. For the week, the S&P 500 posted only a +0.57% rise. The Nasdaq 100 (QQQ) added +1.04% helped by a strong earnings report from semiconductor memory maker Micron, which lifted almost all semi stocks and brought a little renewed vigor to the AI trade. Small cap stocks, which were among the biggest beneficiaries of the Fed rate cut, dipped this week by -0.22%.
Warm wishes and until next week.