(New York)

For many years the prevailing mantra in the equity market had always been “buy the dip”. Every time the market fell, investors bought the dip and encouraged others to do so. However, that approach seems to have disappeared in the carnage of the last couple of weeks. Whereas falls used to be followed by rallies that pushed the market higher, the last few weeks has been characterized by more sustained losses with shallower rallies. Nordea Asset Management’s chief strategist sums up the mood change well, saying “We’ve seen a shift from buying on dips to selling into strength … We’re increasingly moving from glass half full to glass half empty; that’s the narrative here”.

FINSUM: We think that view sums it up well. While we do believe stocks won’t enter a bear market right now because earnings and the economy are solid, we sense that something in investors’ psyches has fundamentally changed.

(Beijing)

New data out of China suggests all is not well. A gauge of Chinese factory output fell to its lowest level in two years. The news arrives at the same time as the country is in a bear market. The data is particularly important because it shows the China’s economy is under pressure from US tariffs even if the direct effect has not showed up in trade data yet. One Chinese economist for ANZ Bank says “The economic conditions facing China’s private sector is much worse than what the headline figure suggests … Besides an expected reserve requirement ratio cut next January, we expect future supportive policy actions to be measured. The government’s priority is to avoid a financial blow-up”.

FINSUM: We think China is going to once again undertake stimulus measures to support the economy, but this time they will be facing a less accommodative trade environment.

(Shanghai)

If you or your clients own any Chinese focused ETFs, you will have noticed a glaring fact—they have hugely variant returns even when the underlying holdings don’t seem that obviously different. China is a study in how different index weightings and configurations can impact returns. For instance, Chinese stocks as a whole have fallen 21% this year, however the 40 or so Chinese focused ETFs in the US market have ranged from a 5% positive to negative 40% return. Even seemingly broad ETFs, like the iShares Large-Cap ETF, have very varying results, as despite the 21% fall, that ETF only dropped 13%. This is because it has a 50% weighting towards financial stocks, which were largely unscathed.

FINSUM: The key point here is to know what you are buying. Each of the indexes being tracked are quite unique, even if you think you are just buying a broad “China ETF”.

(New York)

For the first time in over a decade, Wall Street is giving more to the Democratic party than the Republican party. For the last ten years, big Wall Street banks and financial houses have leaned towards giving more to Republicans, who had a more favorable policy agenda. However, the pendulum seems to have swung the other way on the back of the kind of disruptions some current Republican policies may bring to bear (e.g. trade war). Bankers themselves are also giving more to Democrats.

FINSUM: Bloomberg framed this giving as an attempt by Wall Street to “soften a blue wave”. That sounds like a fair characterization to us—Wall Street wants to make sure to soften the hard edge of some possible forthcoming democrat policies.

(New York)

Is there gain ahead or pain ahead? That is the question on every investors’ mind. Well, Morgan Stanley has an answer. The bank’s chief US equity strategist, Michael Wilson, says that the answer is more pain. The bank thinks we are in a “rolling bear market” and that stocks will reach bear status soon. “We think we get there in four to eight weeks”, says Wilson. The bank defines a bear market as a drop of 20% or more with no recovery for 12 months. “Risk-reward remains unattractive for us”, he added.

FINSUM: Morgan Stanley thinks a lot of these losses come down to the change in central bank policy. We agree with that but we also think investors are just anxious about what lays ahead in terms of a possible recession, trade war, and beyond.