It’s difficult to assign exact blame for the volatility we’ve seen in U.S. stocks. There are several factors you’ll hear, most often the FOMC’s impending exit of ZIRP, falling commodity prices and the rise and fall of Chinese stocks. I suspect they are all somewhat inter-related. But when the dust settles, the 125% gains in the Shanghai Composite from the start of December 2014 to the highs in mid June 2015, and what could be a round-trip move, will be remembered as the incendiary device that finally got US equities to succumb to the volatility the rest of the world was seeing in almost every other risk asset class:
It’s been my view for months, that the above chart holds the key to global risk asset prices for the balance of 2015 (and possibly beyond). Before I (and many others) became focused on the stock market volatility in China in the first half of 2015, it was another chart, one that is very tied to Chinese consumption, that signaled that US equities were due for a wild ride (after a prolonged slumber). Crude Oil:
And this chart of Copper:
People have been warning of the useless consumption in China for years. But most investors took comfort in the notion that the PBOC would manage for a soft landing if and when the debt fueled development ended. We have seen unprecedented attempts by the powers that be to manage the 50% decline in Chinese GDP from its 2007 highs, but it seems most of the focus lately has been to manage the collapse of its stock markets. Taking a look at the 15 yr chart of China’s GDP, it’s clear what the trend has been since 2007. The global economy may want to prepare for mid to high single digits growth for years to come:
And that could be the nail in the coffin for commodity prices, with lower for longer the new normal. That would leave the globe in a deflationary environment 6 years into an economic recovery from the worst financial crisis the world has seen since the Great Depression after unprecedented fiscal and monetary policy equaling more then $10 trillion dollars.
Which leads me to the FOMC’s upcoming rate decision. In my mind it doesn’t matter if the Fed makes a symbolic move, rates aren’t going anywhere until the global economy stabilizes, and if the price action in the Shanghai Composite, or industrial commodities is telling us anything, is that there are lower lows in our near future.
Oh and one last chart, the U.S. Dollar, the new-found strength since mid 2014, has been for a lack of a better term, a wrecking ball for emerging markets and commodity prices. With almost every central bank the world over easing monetary policy, its hard to see a near term future with a dramatically weaker dollar:
U.S. stocks may in a counter-intuitive manner rally on a rate increase on Thursday, but I suspect it will be short lived and a great opportunity to lighten up on stocks. If they don’t raise then I suspect they will be very gentle with their tone as to not rile already nervous investors too much, while also hinting towards an increase in Oct or Dec.
This is obviously one man’s opinion. But at least in the near term, I see few positive outcomes for this chart of the S&P 500. I suspect a bounce to 2000 will be sold, with 2050 MASSIVE long term technical resistance. A breakdown at 1900 and I think we see 1820 again soon:
