China’s newest GDP data has just come in and it is shockingly weak. Third quarter GDP growth was the lowest in has been since the early 1990s and appears to show the sting of US tariffs. Growth was just 6%, a major sign of the weakening state of the global economy. That is the same level of growth as in the late 1980s, though China’s economy is now far larger. Those paying attention will know that China’s economy grew at around 7-8% per year since the Crisis.
FINSUM: So this is an admitted 6%. Beijing keeps very tight control of its economic data, so it is not inconceivable that the real number is actually lower.
Is the bull market winding down? Most people seem to think that is inevitable after such a long run. However, there are some contending the bull market could go on for years. The argument comes from Ciovacco Capital Management, which contends that by analyzing historical charts, the stock market looks poised for another breakout out, especially considering the Brexit deal, the US-China “phase one deal”, and the generally buoyant mood on Wall Street. Ciovacco says worries about China have been the biggest drag on performance, but that a lot of progress has been made, and one more piece of good news, such as the delay of December tariffs, could spark a big run by igniting “animal spirits”.
FINSUM: This is obviously highly speculative. However, it is a decent 30,000 foot view of where the market stands right now.
The US is considering some new rules that could cause a stock market calamity in China. The government is considering putting new restrictions on US capital flowing to the Chinese mainland. The move is considered the third and worst-case-scenario stage for Chinese markets in the current trade war. In particular, the big risk is that MSCI de-lists Chinese stocks from its broader indexes, meaning all that capital would need to be pulled out. That amount is currently around $50 to $60 bn.
FINSUM: This is not hugely massive, but it is certainly enough to hurt markets on a technical front, but perhaps even more from a perception angle.
So let’s say you are in the bullish camp and think the US-China trade spat will be resolved soon. What is the best way to profit from that development? All stocks will likely rise, and bond yields will probably rise too. But where will the best gains be? How about small caps. The argument here may seem counterintuitive, but shows an evolution in thinking on the part of investors. At the start of the trade war, many thought small caps would do well as they are less exposed to international trade. However, thinking has changed and investors are now much more focused on which sectors are most exposed. This has led small caps to have a rough year compared to large caps, mostly because there are so many financial stocks in the small cap sector. That said, a resolution of the trade war would suspend downward pressure on rates and allow the sectors which have beaten up to flourish, offering disproportionate gains for small caps.
FINSUM: This is a fairly sophisticated argument based on the proportion of beaten up stocks that are in the small cap asset class. However, it does make a lot of sense.
The US and China might be starting to realize that they really need each other. Each side is feeling the pain, and that is making a deal feel closer. China has seen a 47% rise in pork prices in the last year—a key form of disturbance to its population, and seems to want to resume importing US pork. Trump has just delayed a new round of tariffs as a measure of good faith before Washington and Beijing return to the negotiating table.
FINSUM: It is quite hard to ascertain the degree to which the US and China actually want to close a trade deal. China has grown so large and self-sufficient that it is big enough to get by on its own, which seems to lower its incentive to compromise. The US is in the same position.