The Nightmare On Wall Street

Andre Sealy:  The end of the trading week has begun, and the start of a new nightmare begins, as this week marks the worst week for stocks since 2011. Not to mention the Dow Jones Industrial Average(INDEXDJX:.DJI) experienced the largest point drop since the financial crisis.

Um, ouch?

And I know I’ve played this meme plenty of times before, but its forever relevant.

Don’t worry. It’s not like we’re in another financial crisis or anything (not yet, at least), but things are apparently so bad, CNBC decided to show a special report Sunday night, dedicated to the carnage that occurred in the financial markets this week. The title: Markets In Turmoil. And the best part about it (other than watching Kelly Evans blow everything out of proportion) is that the show is ‘commercial free.’ So you as the viewer will get every single crucial piece of analysis you need to make smart financial decisions when the markets open Monday morning.

Although if you have better things to do with your Sunday evenings, I can probably take a shot at guessing why the markets have their panties in a bunch: China.

Then again, when is it NOT ever China? The Chinese are usually the scapegoats when it comes to all things economically involved with the U.S. It was all fun and games when the Chinese government had no choice but to halt 70% of stocks trading on The Shanghai Composite Index, due to massive market slumps, quickly followed by a significant amount of selloffs. Shortly after that incident, the largest stock market exchange in the world was halted for most of the intra-day trading session.

Who exactly had the last laugh then? The cause of the shutdown was the direct result of a technical glitch. Nonetheless, this didn’t stop people from blaming the Chinese. Even if untrue, it was still one of the funniest financial gags I’ve heard in a long time.

China: We’ll halt 70% of our stocks US: Oh yeah, we’ll halt the world’s largest stock exchange

— zerohedge (@zerohedge) July 8, 2015

So what exactly do the Chinese have to do with this? There seems to be a growing sentiment of an economic slowdown in China. For years, we’ve been analyzing the Chinese economy, their GDP figures along with the PMI manufacturing numbers, with the assumption that the Chinese economic is far weaker than central government officials let on. Today, we no longer have to assume, because we already know the answer.

Lets start with the fact that that the PBoC decided to devalue their currency a week or so ago. This has confirmed the notion from many Chinese analyst that the economy isn’t growing at the rate it should be, and the central bank is taking additional steps to stimulate the economy. All in an effort to stimulate demand for more Chinese exports abroad, which has dropped by 8.3% year-over-year in July. China is still within the development phase of its economy, and the economy is completely export driven. A drop in the growth of exports threatens the economy’s 7% growth rate, which is already low by historical standards (14.2% was the highest growth in 1992).

Although, what is happening in the exporting sector is also a reflection of what is happening in the manufacturing sector. The Chinese Purchasing Managers’ Index (PMI) fell to 47.1 in August, below estimates of 47.7. This is the lowest the index has been in more than six-and-a-half-year.

Although, this is probably another reason for the Fed to delay raising interest rates next month, this volatility is likely to still be with us in the future. Too many of our largest companies much exposure in Chinese markets, and the U.S. economy is more reliant on the Chinese economy than it tends to realize.

So what do you think?

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This article is brought to you courtesy of Andre Sealy.

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