Worried About China?

|
Includes: CHN, CN, CXSE, FCA, FXI, FXP, GCH, GXC, JFC, MCHI, PGJ, TDF, XPP, YANG, YAO, YINN, YXI
by: Steady Investor

By Zacks Investments Editorial Team

Certainly, it's been a rough few weeks for the markets. Still, our team cannot urge you enough to stay steady - the fundamentals still look good. Too many times we've seen investors change their asset allocations in an emotional response to selling pressures, only to have this do more harm than good.

Now, for our regular programming...

China May be Getting Back on Track - Impossible. You know why? Because they were never really off track to begin with!

Though the figures almost certainly aren't exact or fully reliable, Q4 gross domestic product was said to have come in +6.8% from a year earlier, with full-year growth falling to +6.9%. It's the slowest growth rate in decades, sure. But it's also fairly stout growth for an economy that has grown as rapidly as China's. It makes fundamental economic sense that as a country or company grows in size, growth rates decline over time. General Electric (NYSE:GE) will never grow as fast as a successful Silicon Valley start-up. Other December data out of China was strong by developed nation standards, but disappointing by historical Chinese standards: Industrial output +5.9%; Retail sales +11.1%; Fixed Asset investment growth +10%.

The International Monetary Fund Cuts Growth Forecasts (Who Cares) - Some investors were spooked when the International Monetary Fund (IMF) cut its global growth forecasts to +3.4% in 2016 and +3.6% in 2017, down about -0.2% in both cases. The IMF cited a sharp slowdown in China trade, weak commodity prices and rising interest rates in the U.S. In other words, they're citing the same headwinds everyone has been talking about for well over a year. There are two takeaways we see: first is that the IMF constantly changes their outlook for global growth and are rarely correct; and second is that it's actually a positive to see analysts (and traders) temper their forecasts for growth. It allows a better opportunity for growth to surprise to the upside, which is good for stocks.

Checking in on Q4 Earnings - The early flow of earnings reports, particularly from the Finance sector, have been fairly decent so far. But you wouldn't know it just from looking at bank stocks, which haven't been responding well to Q4 results. Their underperformance is likely being driven by a combination of the market's evolving interest rate expectations (which have been running counter to the Fed's declared aims) and fears that losses from Energy sector loans are spiraling out of control (false fear). Beyond Finance, there haven't been any major surprises in the Q4 earnings season so far. We knew that growth would be challenged, and that's what we are seeing, with Q4 earnings growth for the S&P 500 on track to be in the negative for the third quarter in a row.

Looking at Q4 as a whole, total earnings for the S&P 500 index are expected to be down -6.8% from the same period last year on a -4.6% decline in revenues. The Energy sector's impact is in the opposite direction, with total earnings for the sector expected to be down -71.3% on -38.1% lower revenues. In Q2 and Q3, we had a scenario where earnings ex-Energy were nicely positive, so in aggregate, the underlying strength of the economy was being masked a bit. In Q4 the story is a little different, we think, as excluding the Energy sector could still produce negative earnings, down -1.1%. This could add to the volatility we see in coming weeks. Stay steady; earnings should post a nice comeback in the second half of the year.

Disclosure: Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

This communication is for informational purposes only and nothing herein should be construed as a solicitation, recommendation or an offer to buy or sell any securities or product, and does not constitute legal or tax advice. The information contained herein has been obtained from sources believed to be reliable but we do not guarantee accuracy or completeness. Zacks Investment Management, Inc. is not engaged in rendering legal, tax, accounting or other professional services. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel.