Question?

Join the conversation and feel free to submit a question to our experts.

Submit a question

Listen.

Listen in on our hour-long show, from Monday-Friday 12-1pm on KPRC AM 950

Subscribe.

Stay up to date and have the STA Weekly Report and 401k Plan Manager emailed to you.

Subscribe

Insights.

Read STA's Featured Articles

Read More

STA Weekly Report – China’s Economy and the Implications for Global Equities

Print Friendly, PDF & Email

INSIDE THIS EDITION:
China’s Economy and the Implications for Global Equities
A Lot of Moving Averages Are Being Tested
Transports and Energy Stocks Slip Below 50-Day Lines – Small Caps May Be Next
Early Bounce in S&P 500 is Fading
Weekly Snapshot of Global Asset Class Performance
401k Plan Manager*Updated on 12/31/2018

As far as global economies go, China is without a doubt one of the most important geographies for investors to keep up with. It is the world’s largest manufacturing economy, maintains a leadership position in terms of exports, and represents a fast-growing consumer base.

Read More

With these characteristics, it is no wonder why China is able to provide consumers in the United States with inexpensive goods and provides support to the world economy through strong demand for goods and services produced outside of China. However, there is a potential downside – the Chinese economy is so important to global economic activity that any deterioration in the Chinese economy has the potential to trigger economic deterioration elsewhere.  This is the nature of a complex global economic system.

China Economic Update

So what is going on in the Chinese economy and how might it affect us as investors in the United States? That’s a simple question to ask but not an easy one to answer. The reason is that data out of China can be  somewhat opaque. However, we do know there are some good data points to at least observe to get a better sense of what may be occurring.

We can begin with the China Purchasing Managers Index (PMI). PMI numbers help to explain whether the manufacturing sector (remember, China is one of the world leaders in manufacturing), is expanding or contracting. When the PMI reading is above 50, it indicates expansion and when it is below 50, it suggests contraction. The last reported data from China was for December and showed a sharp decline, a continuation of a trend that emerged during the second quarter of 2018. With China’s PMI now below 49.5, it bears watching. 

GDP growth in China has also decelerated. However, this is nothing new. In fact, since 2010, China has shown deceleration of GDP growth which is to be expected. As the Chinese economy continues growing, it becomes more difficult to post increasingly robust GDP growth numbers. That is why for investors, the absolute year-over-year growth percentage in GDP might be less important than the overall growth trend. That said, a GDP growth slowdown in China has been a concern for some time and the added uncertainty around the full impact of not having a trade agreement in place with the US only adds to investor concerns.

Another important measure of economic performance for China, and for any other major economy, of course comes from the corporate sector. More specifically, the overall trend in earnings. Going back to 2012 corporate earnings growth in China flattened out in a trend that lasted through 2016. Since then however, earnings showed improvement. For example, Chinese industrial companies showed profits up 8.4% in 2016, up 22.8% in 2017, before another relatively strong showing through the first three quarters of 2018.

From these three data points, it is apparent that the economic picture in China is somewhat mixed. And while data released earlier this week indicate some further stability in China’s economy as stimulus programs take effect, there remain questions about China’s credit markets and of course trade. Until these issues are resolved, or at the very least are given a path to resolution, global equities could struggle to move meaningfully higher. The reason is that anytime a global recovery has occurred in the recent past, it has been on the back of a Chinese economic recovery. It is of course possible that it will be different than past global recoveries, but with the size of the world’s GDP tied to China in some way or another, it appears unlikely to be any different this time around.

A Lot of Moving Averages Are Being Tested

Recent messages have focused on major U.S stock indexes reaching overhead resistance barriers which could slow their January advance; or maybe even end it.

Read More



All of those major stock indexes remain below their 200-day averages; while their 50-day lines remain below their 200-day lines. That puts the onus on the bulls to push stock indexes high enough to reverse those negative trends. Yesterday’s stock selloff suggested that the January rally might be stalling. This morning’s early bounce in stocks appears to be fading. That puts the market in an important testing process. The same is true of several stock groups. What they do with those resistance lines may help determine the direction of the market as a whole. Let’s start with some 200-day averages. 

Chart 1 shows the Consumer Discretionary SPDR (XLY) meeting new selling at its 200-day average (red line). That’s an important test for that economically-sensitive sector. Chart 2 shows the Biotechnology Index ($BTK) struggling to stay above its 200-day line. Looking overseas, Chart 3 shows Emerging Markets IShares (EEM) struggling with overhead resistance formed at its early December peak and its 200-day average. Emerging market stocks have led the January rebound in global stocks. What EEM does from here may help determine if that rebound runs into trouble.

Transports and Energy Stocks Slip Below 50-Day Lines – Small Caps May Be Next

Some stock indexes are in danger of slipping back below their 50-day lines. Chart 4 shows the Dow Jones Transportation Average falling back below its 50-day average (blue line) in today’s trading. The transports are one of the most economically-sensitive stock groups, and helped lead the fourth quarter meltdown. New selling in that group would be a negative sign for stocks. Energy stocks are also weakening. Chart 5 shows the Energy SPDR (XLE) trading below its 50-day line today. Weaker oil prices are the main reason why. And weaker oil prices are a sign of weaker global demand. That’s another potential negative for U.S. stocks. Small caps may be the next group to fall below their 50-day line. Chart 6 shows the S&P 600 Small Cap index sitting right on its 50-day line. A close back below that resistance line would be a negative sign for that group, and large cap stocks as well. That’s because large caps usually follow the direction of smaller stocks.  Semiconductors are also in danger of falling back below their 50-day average.

Early Bounce In S&P 500 is Fading

Stocks are at an important chart juncture. Chart 8 shows the S&P 500 backing off from overhead resistance formed between its October-November lows and its early December high. It also remains well below its 200-day average (red line). Chart 8 also shows its 9-day RSI line (upper box) backing off from overhead territory at 70. After opening higher this morning, the stock rally appears to be fading. Chart 8 shows the SPX sitting right on its 50-day line (which is declining). Last week’s move above that resistance line was an encouraging sign. A close back below that blue line this week would negate that positive short-term signal. And would strengthen the view that the January stock rebound is starting to weaken.

Weekly Snapshot of Global Asset Class Performance


If you have any questions, please feel free to email me at luke@stawealth.com.

Luke

STA Investment Committee

Luke Patterson, CEO & Chief Investment Officer

Mike Smith, President

Andrei Costas, Senior Investment Analyst (Equity Strategies)

Nan Lu, Senior Investment Analyst (Fixed Income Strategies)

Maximizing Opportunities in Today’s Trade Market

Event Date:  February 26, 2019

To attend, click link to Register Now

If you are a business owner or executive that is looking to learn how to maximize import/export trade in today’s global markets, this event is for you.  STA is proud to co-sponsor this event and breakfast discussion where a panel of trade experts will further explore the current trends and opportunities happening globally and ideas to optimize your global trade business activity.

Important Disclosure:
Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by STA Wealth Management, LLC (“STA”), or any non-investment related content, made reference to directly or indirectly in this article / newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this article / newsletter serves as the receipt of, or as a substitute for, personalized investment advice from STA.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  STA is neither a law firm nor a certified public accounting firm and no portion of the article / newsletter content should be construed as legal or accounting advice.  A copy of the STA’s current written disclosure Brochure discussing our advisory services and fees is available upon request. Please Note: If you are a STA client, please remember to contact STA, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. STA shall continue to rely on the accuracy of information that you have provided.

FacebookTwitterPinterest

Contact STA

Thank you for your interest in STA Wealth Management!

Whether you are looking for someone to partner with you in protecting and growing your assets, or you are an experienced financial advisor interested in joining the STA team, we want to hear from you. Please call us or email us, and we’ll be in touch as soon as possible!

Houston Headquarters

CityCentre One
800 Town & Country Boulevard, Suite 410
Houston, TX 77024

Phone:

281.822.8800  

Sugar Land Office

Granite Tower
13131 Dairy Ashford, Suite 150
Sugar Land, TX 77478

Phone:

281.652.5303

Email

Info@stawealth.com

For directions to our Houston office, click here.