Stocks Tumble as Chinese Growth, Oil Demand Hit the Wall

Stocks fell across the board on Tuesday, in the wake of disappointing manufacturing data from the world’s second-largest economy. Falling crude oil prices also dampened equities, after the International Energy Agency (IEA) on Tuesday slashed its forecast for oil demand growth.

As the Chinese growth engine sputters, demand for oil diminishes. And so does investor appetite for risk.

China reported that its growth in industrial value-added output slowed to an annual rate of 6.2% in October, down from 6.6% in September.

China also reported that private fixed-asset investment increased 5.8% on a year-over-year basis in the first 10 months of this year, lower than the 6% increase for the first nine months.

It doesn’t help that China appears to be a debt bomb ready to explode. The International Monetary Fund estimates that the country’s corporate debt stands at 145% of gross domestic product, which is extremely high by any measure.

State-owned enterprises in China account for about 55% of corporate debt. The current complacency about the country’s looming debt crisis leaves investors exposed. As we’ve seen in recent years, a panic in China can quickly spread into a global financial contagion.

The IEA’s bearish oil forecast Tuesday pulled down oil prices. West Texas Intermediate fell $1.15 to close at $55.61 per barrel. Brent North Sea crude plunged $1.12 to close at $62.04/bbl.

Further delay of tax reform in the U.S. also weighed on markets Tuesday.

“Watch what we do, not what we say,” Attorney General John Mitchell advised the press at the start of the Nixon administration. Investors should heed those words when it comes to promised tax cuts.

President Trump and Congress continue to promise sweeping tax reform. For the GOP, the stakes are high. The party in power is desperate for a “win.” Lawmakers on Capitol Hill make daily pronouncements of progress.

But the expressions of confidence are belied by the lack of results. Wall Street is frustrated that lawmakers still haven’t moved the needle forward.

Bad news from China, falling oil prices and inaction on tax reform were the major catalysts for Tuesday’s slide. The top performing sectors were health services and retail. The worst laggards were consumer non-durables and energy.

Helping lift the retail sector was Home Depot (NYSE: HD), which reported stellar third-quarter operating results on Tuesday. The home improvement chain also raised its guidance for the year. Shares of HD rose 1.65% on Tuesday.

General Electric (NYSE: GE) continues to struggle with restructuring and weak guidance, pressuring the Dow Jones Industrial Average of which it is a component. GE closed the day down 5.94%.

Is the long-awaited correction finally at hand? It’s understandable to be worried about the sustainability of the market’s rally this year.

The broader indices repeatedly hit new highs in 2017, but this aging bull market is showing signs of fatigue. Even the usually upbeat pundits on financial television are starting to weigh in with measured pessimism.

Here in the U.S., corporate earnings reports as well as economic growth rates in the third quarter have been strong. But they haven’t been robust enough to justify these high stock valuations. Analysts are grading earnings scorecards on a curve.

However, in the U.S. at least, recovery appears to be on track. Several key indicators, notably falling unemployment and rising home prices, warrant optimism. In this mixed bag environment, you shouldn’t panic and head for the exits. But you shouldn’t be complacent, either.

Sure, stock valuations are high. But other asset classes have less appeal. I call it the “TINA” syndrome (There Is No Alternative).

CAPE Fear…

The cyclically adjusted price-earnings ratio (CAPE) currently shows that U.S. equities previously have been more highly valued only twice before — in 1929 and in 1999. We know how those years turned out.

Devised by Robert Shiller of Yale, CAPE averages corporate profits over 10 years. Many investors consider CAPE to be the best valuation tool.

“Stocks are overvalued” has been a dominant narrative all year. But it makes investors yawn. Fact is, traders aren’t looking at stocks in isolation. They’re choosing among cash, which yields close to nothing, and government bonds.

Government-bond yields are extremely low. A comparison of the expected returns from stocks and bonds shows that stocks should perform better. That’s true, even though CAPE hovers at dangerously high levels.

Simply put, stocks remain the best game in town. But Tuesday’s dismal day on Wall Street showed that the exuberance is fading.

Tuesday Market Wrap

  • DJIA -0.13% or -30.23 points, to close at 23,409.47
  • S&P 500 -0.23% or -5.97 points, to close at 2,578.87
  • Nasdaq -0.29% or -19.72 points, to close at 6,737.87

Tuesday’s Big Gainers

  • Advance Auto Parts (NYSE: AAP) +15.92%

Shares jump after 3Q earnings beat.

  • Envision Healthcare (NYSE: EVHC) +10.09%

Health care provider attracting buyout interest.

  • Delphi Automotive (NYSE: DLPH) +4.84%

Board approves spin-off of powertrain segment into new publicly traded company.

Tuesday’s Big Losers

  • Newfield Exploration (NYSE: NFX)

Lower oil and gas prices dampen prospects for energy producer’s turnaround.

  • Range Resources (NYSE: RRC) -6.57%

Energy producer slides in tandem with oil and gas prices.

  •  TJX Companies (NYSE: TJX) -4.04%

Retailer issues disappointing 3Q earnings report.

Letters to the Editor

Here’s a recent reader email, in its entirety:

“Almost 3 years ago I was laid off from a major Canadian Oil Company with a handsome payout after working there for 38 years.

I’ve invested in the stock market (mostly successfully) since the early 2000’s. I got hit in 2007/2008, but not too bad. After my payout I had >600k in investable capital. I’ve been spending >75k each year. I now have more than 700k in my investment accounts.

 Here’s a look at some of my investments. STZ bought @ just over $20, now more than $200; AAPL before the split, MSFT, RY more than doubled. However, the biggest is ACB.TO, a marijuana stock, bought @ $1.42 just over a year ago (I bought 25,000 shares), it’s now worth $5.97 each. Today I made $39k in my portfolio. Wow, I never would have thought this would be possible. Hopefully you’ll publish this.” — Rose M.

Rose, your letter proves the power of self-directed investing. Please note that Apple (NSDQ: AAPL) and Microsoft (NSDQ: MSFT) are longtime holdings in the Growth Portfolio of our flagship publication Personal Finance.

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John Persinos is managing editor of Personal Finance and chief investment strategist of Breakthrough Tech Profits.