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China Syndrome: The Sequel

By Jim Pearce on January 8, 2016

Like a bad movie sequel, this week’s China-inspired stock market swoon may turn out to be worse than the original 2015 summer blockbuster. In August the U.S. stock market dropped more than 10% after China’s initial foray into letting its currency float in an attempt to shore up its flagging economy. Cheaper currency, in theory, would boost its exports.

You may remember the movie “China Syndrome” (1979; Jack Lemmon, Jane Fonda and Michael Douglas), ended with a nuclear meltdown disaster barely averted.  

And much like that movie, the measures to bolster the Chinese stock market seemed to avert a crash, as both Chinese and American stocks staged solid recoveries.

But now we’re faced with “China Syndrome: The Sequel.”  This week’s news out of China that exports in December fell sharply convinced its government that it should let a little more air out of the bubble. That triggered a rush for the exits, forcing China to implement “circuit breakers” twice this week to shut down trading in its stock market and a meltdown. That market plummeted more than 7% in the first thirty minutes of trading on Thursday morning alone.

The U.S. stock market followed suit, with the Dow Jones Industrial Average declining more than 5% during the first four trading days of this year – its’ worst start ever. That wiped out all of its gains since Sept. 30, effectively erasing what had been a solid fourth quarter.

Further weighing on investors’ minds was Friday morning’s announcement of U.S. employment for December. A weak number and/or downward revisions to figures for prior months could have triggered a market freefall, confirming fears that the U.S. economy is tightly tied to China’s. If so, then the doomsday scenario some have expected since last summer’s correction may well have come true.

Fortunately, the employment news was all good. Not only did the numbers for December come in better than expected, with 292,000 new jobs added to the American economy and the labor force participation rate ticking up to 62.6%, but data for October and November were revised higher by another 50,000 jobs.

 Although China may still pull down the rest of the developed world with it if it doesn’t get its act together, at the moment the Fed’s is right: our economy can stand on its own.

With that backdrop heading into January, we expect more volatility to come, as most companies report quarterly and year-end earnings. In the wake of this latest market upheaval, every scrap of financial data will be scrutinized to the nth degree, and the accompanying forward looking statements will be searched for any hint of bad news or ambiguity.

Remaining logical during times like this is tough. Our emotions tend to get the better of us, triggering impulses based on fear and greed that spur us to make bad decisions—consider the massive selling out of the stock market during the depths of the financial crash in 2009.

One day it appears the stock market is on the verge of collapsing, and the next day it roars back for no apparent reason. We know that’s when you rely on us the most to help you make portfolio decisions that will pay off in the long run. We can help you write your own investing script and not be sucked into a disaster blockbuster that China may produce.

Until further notice our advice to investors remains unchanged; avoid Asia, and focus on large-cap American companies with positive cash flow that are priced at reasonable multiples to future earnings. If you own high-priced momentum stocks, have a clear strategy for selling them, since they are most prone to dropping the fastest.

This will also be a good time to add quality companies to your portfolio that temporarily get sucked down with the rest of the market. You can identify them by utilizing my IDEAL Stock Rating System, which provides an objective measure of how every stock in the S&P 500 Index compares to one another based on fundamental valuation metrics, and is updated daily as new information comes into the market.

I will discuss all of this in much more detail in the next issue of Personal Finance, so please be sure to take a look at it. In the meantime, I and all our other analysts are available to respond to your questions via the Stock Talk function on each of our product websites.

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